MNI STATE OF PLAY: Still A Chance For PBOC To Cut The LPR

A small cut in the People’s Bank of China’s key lending reference rate could happen at the end of the week with a deeper drop constrained by a pickup in inflation, a weaker yuan, and doubts on the effectiveness of monetary easing when Covid-19 lockdowns remain.

The loan prime rate (LPR) is likely to be cut on May 20 to bolster credit demand, the focus of the PBOC to support employment and boost the domestic economy, said Li Chao, chief economist at Zheshang Securities and a former official at the central bank.

There is still a chance for the central bank to cut both the one-year and five-year LPR by 5bps each, even though the one-year medium-term lending facility (MLF), which the LPR is pegged to, was unchanged at 2.85% after a review on Monday, Li said.

A reduction in funding costs for lenders would lead to lower quotes that commercial banks submitted to the central bank monthly that are part of closely-watched components that influence the LPR besides the MLF, analysts said. .

The weighted average rate for new deposit fell 10bps in end April to 2.37%, according to the PBOC, while the seven-day repo rate, a key short-term funding gauge for banks, dropped to 1.53%, the lowest since May 2020.

The AAA-rated negotiable certificate of deposi（NCD), a gauge of borrowing cost between financial institutions, fell to about 2.3%, much lower than the 2.85% of one-year MLF.

Ming Ming, chief economist at CITIC Securities and a former PBOC official, said the central bank’s April overhaul of the deposit rate mechanism that connected deposit interest rates to the 10-year government bond yield and LPR, and a 25bp-reserve requirement ratio cut have combined with the use of structural monetary tools to push down lenders’ costs and open room for a lower LPR.

It would a fourth time the PBOC cut the LPR without touching the MLF after the LPR was introduced in 2019, in August and September of that year and in December 2021.

MODEST CUTS

But opinion is split among economists and analysts who think the PBOC would hesitate to cut the LPR as inflation has started to edge up, See: MNI: China Inflation Surge Limits Policy Space.

Guan Tao, global chief economist at BOC International and former official at the State Administration of Foreign Exchange, said the consecutive pickup in the consumer price index (CPI) in the past two months indicated the imported inflation pressure has increased. The PBOC may have to make difficult choices if the CPI continues to go up, Tao said.

In addition, using monetary policy to boost credit demand during Covid-19 lockdowns is seen as less effective.

Zhang Jianhua, former president of Huaxia Bank and former head of the PBOC research bureau, said the limited borrowing appetite of companies and consumers is more linked to perceptions on the geopolitical conflicts and domestic pandemic conditions. He thinks funding unlocked by monetary easing bears costs which need to be repaid and both companies and consumers can hardly afford this new debt, suggesting fiscal policy is more appropriate in boosting confidence.

FUTURE FOCUS

New loans in April slumped to 44% of the same period a year ago, the lowest since 2013, according to the PBOC’s latest credit data.

The PBOC told reporters after the data release that the funding demand of companies saw “an obvious drop” pressured by Covid-19 curbs and rising production costs.

Zhong Zhengsheng, chief economist of PingAn Securities and a former PBOC official, said the monetary policy would focus on ample liquidity. In addition, boosting credit would take a series of steps, including lower real loan interest rates, further cutting deposit costs for lenders, accelerating the launch of structural facilities, and increasing long-term loans and targeting help to sectors suffering badly from the pandemic, Zhong said.