China resists loan rate cuts, but changes ‘still likely’ as economy struggles under zero-Covid

China’s one-year loan prime rate (LPR) remained unchanged at 3.7 per cent, the People’s Bank of China (PBOC) said on Monday
The five-year LPR, which is the reference for mortgages, also remained unchanged at 4.45 per cent

Global interest rates

Andrew Mullen

Published: 9:22am, 20 Jun, 2022

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China kept its benchmark lending rate unchanged on Monday, again resisting the chance to follow in the footsteps of the US Federal Reserve despite the challenges facing its economy.

The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – remained at 3.7 per cent at the June fixing, according to the People’s Bank of China.

And the five-year LPR – which is a reference rate for mortgages – also remained at 4.45 per cent having been lowered from 4.6 per cent in May. This had represented the largest cut on record and the second this year after the rate was also reduced from 4.65 per cent in January.

China’s economy improved marginally in May, when Premier Li Keqiang released a 33-point rescue package and ordered local cadres to thoroughly implement the measures to avoid an economic contraction in the second quarter.

With the weak economic recovery, rate cuts in the coming months are still likely as we expect the economic recovery to be slow under the zero-Covid policy

Iris Pang

However, monthly retails sales growth remained negative last month, indicating that there is still a long way to go to achieve the country’s ambitious growth target of “ around 5.5 per cent”.

“With the weak economic recovery, rate cuts in the coming months are still likely as we expect the economic recovery to be slow under the zero-Covid policy,” said Iris Pang, chief economist for Greater China at ING.

“After this rate pause, the government should hand out more fiscal stimulus as monetary policy is now a secondary policy tool for supporting the economic recovery.”

Last week, the People’s Bank of China had refrained from lowering a key policy rate, keeping the interest rate of one-year medium-term lending facility (MLF) loans unchanged at 2.85 per cent.

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MLF loans are a key tool used by the central bank to release medium-term liquidity into the interbank market. Any cut to its interest rate would have been viewed as a clear signal to boost the economy.

The move on Wednesday came despite US Federal Reserve chair Jerome Powell announcing hours earlier that the US’ key lending rate would increase by 75 basis points – or three-quarters of a per cent – to a range of between 1.5 per cent and 1.75 per cent.

The biggest increase in 28 years came after the US Federal Reserve made smaller increases of 50 basis points last month and 25 basis points in March.

The LPR has been considered China’s de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s MLF.

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