China ‘unsurprisingly’ keeps benchmark loan rate unchanged for second straight month
- The one-year loan prime rate (LPR) remained at 3.85 per cent, while the five-year LPR was also steady at 4.65 per cent
- The People’s Bank of China (PBOC) rolled over some maturing medium-term loans last week, while keeping interest rates unchanged for the second straight month in a row
China left its benchmark lending rate unchanged for the second straight month at its June fixing on Monday, matching market expectations, after the central bank kept borrowing costs on medium-term loans steady last week.
The one-year loan prime rate (LPR) remained at 3.85 per cent, while the five-year LPR was also steady at 4.65 per cent.
The move in the LPR affects the price lenders charge companies and households for loans, and the five-year rate influences the pricing of mortgages.
A Reuters survey of traders and analysts conducted last week showed more than 70 per cent of all participants expected China to keep the lending benchmark unchanged this month. Only 20 per cent of all respondents predicted a marginal cut to the one-year LPR.
The inaction is not surprising: the PBOC did not lower the rate on its medium-term lending facility this month as it did ahead of the past three LPR cuts
The People’s Bank of China (PBOC) rolled over some maturing medium-term loans last week, while keeping interest rates unchanged for the second straight month in a row.
The medium-term lending facility (MLF), one of the PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the new LPR. The interest rate on one-year MLF stands at 2.95 per cent.
The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August 2019, loosely pegging it to the MLF rate.
“The inaction is not surprising: the PBOC did not lower the rate on its medium-term lending facility this month as it did ahead of the past three LPR cuts. This would have been the most straightforward way for the PBOC to push down the LPR, which is set as a spread above the MLF rate. The PBOC has also allowed market interbank rates to rise in recent weeks, which will have made banks more reluctant to lower their lending rates,” said Martin Rasmussen, China economist at Capital Economics.
“We expect another 20 basis points of cuts to the PBOC reverse repo and MLF rates next quarter, which ought to mechanically lower the LPR. But we no longer expect the PBOC to push down market interbank rates much below their recent lows. And while further cuts to banks’ required reserve ratios (RRR) still look likely, the aim will probably be to keep interbank rates low rather than to engineer further declines.”
