China defies easing calls as PBOC keeps rates steady and shifts focus to fiscal support

China's central bank (PBOC) has taken a notably restrained approach to interest rates amidst economic challenges, surprising markets with its decision to hold rates steady. Over the past year, it has only cut its policy rate by 10 basis points, the smallest reduction since 2021, despite widespread expectations for aggressive cuts. The cautious stance comes as Beijing shifts to a 'moderately loose' monetary policy, yet concerns over banking stability and a resilient export sector have lessened the urgency for sweeping cuts. Compared to global peers, China's rate adjustments are minimal, with inflation-adjusted rates moving back to positive territory. As recent interventions reflect, targeted measures have kept liquidity flowing without broadly lowering benchmark rates. With the 7-day reverse repo at 1.4% and limited room for cuts, fiscal policy is expected to play a larger role in supporting the economy going forward, further emphasizing a divergence in policy direction compared to more aggressive easing globally.