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China's central bank on Tuesday left its benchmark rate for loans unchanged for the 15th straight month even after a cut in the cash reserve requirement ratio for banks by 50 bps earlier this month.
The Loan Prime Rate, guiding companies' cost of borrowing, remains at 3.85% for the one-year maturity and 4.65% for five years. Market participants were divided over the need for more easing including a lower LPR right after the RRR cut, as data last week allayed fears of a further slowdown in China's growth.
The PBOC had left the one-year Medium-term Lending Facility rate which is viewed as being closer to market rates and is linked to LPR, at 2.95% on July 15. The PBOC said CNY1 trillion of funds released by the RRR cut will be used by financial institutions to return the maturing medium-term lending facility (MLF) and fill in the liquidity gap during the tax season in mid-to-late July, emphasizing it was not changing its prudent monetary policy stance.
The outcome is in line with advisors saying that the central bank should be cautious to cut policy rates now, considering it may boost property price and market leverage.
Since the previous LPR reform in August 2019, the PBOC has cut 46 bps off the one-year LPR and 20bps off the five-year. In April 2020, after a 6.8% contraction in Q1 GDP, the PBOC cut the one-year LPR by 20 bps and the five-year by 10 bps, the biggest cuts since the LPR mechanism was reformed in August 2019.