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 economy

Reuters

Published: 10:13am, 21 Dec, 2020

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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.

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, confirmed the People’s Bank of China (PBOC).

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.

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

Julian Evans-Pritchard

“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 rate decision reflected continued economic recovery from coronavirus shocks in the world’s second-largest economy, and comes after the central bank made its biggest ever injection of medium-term funds last week to shore up liquidity.

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 back on track, some senior central bank officials have repeatedly raised the topic of exiting loose monetary policies recently.

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The annual Central Economic Work Conference, a gathering of top leaders and policymakers, said last week that China will maintain support for its economic recovery and avoid sudden shifts in policy to help keep economic growth within a reasonable range.

“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.”

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