China keeps benchmark loan rate steady for fifth straight month, but could increase early next year
- The one-year loan prime rate (LPR) was kept unchanged at 3.85 per cent, while the five-year LPR remained at 4.65 per cent
- The rate decision came after the People’s Bank of China kept the borrowing cost on medium-term lending facility (MLF) loans also unchanged for the fifth straight month
China kept its benchmark lending rate for corporate and household loans steady for the fifth straight month at its September fixing on Monday, as expected.
Most new and outstanding loans are based on the LPR, while the five-year rate influences the pricing of mortgages.
Thirty-one out of 35 traders and analysts, or nearly 90 per cent, in a snap Reuters poll conducted last week saw no change to either the one-year or the five-year LPR.
The rate decision came after the People’s Bank of China (PBOC) kept the borrowing cost on medium-term lending facility (MLF) loans unchanged for the fifth straight month.
MLF, one of the PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR.
Recent economic data showed that the world’s second-largest economy has steadily recovered from a virus-induced slump, but analysts say policymakers face a tough job sustaining stable expansion over the next few years.
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.
“With the economy now largely back to its pre-virus path and the PBOC appearing reluctant to keep monetary policy loose for longer than needed, we think the next move in the LPR will be an increase early next year,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“It is not surprising that the LPR was left unchanged since the PBOC had not adjusted the rate on its medium-term lending facility (MLF) this month as it did ahead of the past three LPR moves. This would have been the most straightforward way for the PBOC to influence the LPR, which is set as a spread above the MLF rate. What’s more, the PBOC has kept market interbank rates – banks’ marginal funding cost – broadly stable in recent weeks around the rate at which it offers funds via its daily repo operations. This gave banks little reason to adjust their lending rates.
“With fiscal policy to remain supportive for the remainder of the year, the PBOC appears to see little need for further rate declines and has instead shifted its focus back to containing financial risks. In fact, we think the next move in the LPR will likely be an increase, though probably not until early next year once the remaining slack in the labour market has been absorbed.”