China ‘unsurprisingly’ keeps benchmark loan rate unchanged for eighth straight month ahead of ‘hike’ in 2021
- 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
- Last week, China’s top policymakers pledged to continue ‘necessary support’ for the nation’s economic recovery
China kept its benchmark lending rate for corporate and household loans unchanged at its December fixing on Monday, as expected, although improving economic fundamentals have raised speculation about a rate hike next year.
For the year, the one-year LPR was down a total 30 basis points of rate cuts, and the five-year rate was cut by 15 basis points of two cuts in 2020.
Most new and outstanding loans are based on the LPR, while the five-year rate influences the pricing of mortgages.
All 34 traders and analysts in a snap Reuters poll conducted last week predicted no change in either one-year or five-year LPRs.
“Commercial banks left the loan prime rate on hold. But with China’s leadership eyeing a gradual withdrawal of policy support, we think the PBOC will start to hike its policy rates next year,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“The inaction does not come as a surprise 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.”
The interest rate on those loans was unchanged for the eighth month in a row, after recent corporate bond defaults shattered investor confidence and scuppered new issuance.
“With the economy now back on track, the PBOC is shifting its focus away from supporting growth back towards reining in financial risks. It has already allowed market interbank rates to return to pre-Covid levels,” added Evans-Pritchard.
“And the Central Economic Work Conference, which concluded on Friday, suggests that it may soon formalise this by hiking its policy rates. While the post-conference readout still framed the monetary stance as “prudent”, it added that policy would be “reasonable” and “appropriate”.
“That may seem like a minor addition. But subtle changes in language have flagged forthcoming policy shifts in the past. We expect PBOC policy rates to rise by 30 basis points in 2021, whereas most analysts think the PBOC will remain on hold.”