MNI EXCLUSIVE: PBOC To Guide Loan Prime Rate Lower: Advisors

     BEIJING (MNI) - A People's Bank of China benchmark key for setting

companies' cost of borrowing is likely to be guided lower on Wednesday after the

PBOC adjusted an open market rate earlier in the month, government advisors

said.

     The Loan Prime Rate will fall in accordance with Nov. 5's 5 bps cut in the

Medium-Term Lending Facility, said Chen Daofu, vice-director at the Financial

Research Institute at the State Council's Development Research Centre, noting

that real interest rates are still relatively high.

     According to the PBOC's latest report, the weighted average loan rate was

5.96% in Q3, 2bps higher than in Q2, despite an 11bps reduction in the LPR since

August.

     The PBOC on Monday also cut its 7-day reverse repo rate for the first time

in four years, by 5bps to 2.50%.

     Xu Hongcai, deputy director of the Economic Policy Commission of the China

Association of Policy Science, said the 7-day rate cut was mainly to stabilise

market sentiment, after traded rates had tracked higher in recent months. He

also expected a trimming of the LPR on Wednesday.

     The central bank is cautious about cutting rates too quickly, he said, for

fear that increased liquidity could trigger risks to the yuan and capital

outflows.

     The monthly average for the 7-day d-repo rate, a main gauge for interbank

liquidity, was 2.648% in October, up from a Q3 average of 2.587%. The one-year

negotiable CD rate touched 3.7%, higher than the 3.25% for the same maturity

MLF.

     Further cuts would ease the burden on borrowers as the economy slows,

although the People's Bank of China faces a dilemma as consumer prices rise and

factory prices fall.

     --SUPPORT FOR BUSINESS

     Zhang Junwei, a vice-director of a research body attached to the State

Council, said Monday's easing indicated policymakers were still prioritising

support to business.

     "The PBOC's open market operations rate cut is to ease liquidity in the

interbank market, and the operation is a tilt to an easing bias,"said Zhang

Yongjun, deputy chief economist at the China Centre for International Economic

Exchange, a National Development and Reform Commission think tank. The 5bps cut

would have only a limited downward effect on borrowing rates in the real

economy, Zhang said.

     The PBOC reiterated in its quarterly report published Saturday that policy

would continue to be set "according to 'growth and price changes" with

adjustments looking to "enhance the guide of expectation."

     The pick-up in the flow of credit into the real economy remains sluggish,

despite the central bank's helping to lower corporate borrowing costs through

innovative policy moves, including the introduction of the more

market-determined Loan Prime Rate.

     The PBOC is having to balance a higher rate of increase in consumer prices

as food costs surge with slowing producer price inflation, advisors noted.

     The quarterly report said the Bank saw the gap between CPI and PPI

narrowing in the second half of 2020 as food prices stabilise, helping prevent a

pick-up in inflation expectations.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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