MNI PBOC WATCH: LPR To Hold, More Easing Eyed On Fed Cut

MNI (BEIJING) - China's Loan Prime Rate is expected to hold steady on Friday despite recent data revealing significant economic challenges ahead and increasing expectations of a rate and reserve requirement ratio cut later this year supported by the Federal Reserve’s recent move lower.

The one-year LPR will remain at 3.35% and the five-year rate will hold steady at 3.85%. Both rates unexpectedly fell in July by 10 basis points after the central bank lowered the 7-day reverse repo rate by the same level. The PBOC has not shifted the 7-day rate so far this month. 

The PBOC signalled the possibility to ease and its concern over soft demand and deflation, pledging last Friday to provide additional measures to reduce corporate and household sector funding costs in a rare public statement after the release of disappointing credit data. (See MNI: PBOC Seen Cutting Repo Rate Soon, Boosting Bond Trades)

New yuan loans in August printed at CNY900 billion, a year-on-year decrease of CNY460 billion, dragged down by weak corporate and household credit, while growth of financial institutions’ loan balances and total social financing stock hit an historical low, indicating continued weak domestic demand and market sentiment.

While Zou Lan, head of the PBOC's monetary policy department, told reporters early this month that constrains existed on further reductions in deposit and loan interest rates considering factors such as the narrowing interest margins of lenders and the fast flow of banks' deposits into asset management products, the Fed's 50bp cut this week should provide space for the central bank to act later this year. (See MNI: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional)

DISAPPOINTING DATA 

Recent economic data has continued to show signs of further weakness in August. National Bureau of Statistics data showed exports mainly drove August growth, while industrial output, retail sales and investment hit yearly lows. Infrastructure investment growth also slid to its lowest level since early 2022.

The bond market has continued to reflect a lack of confidence in growth and growing easing expectations, with 10-year treasury yields falling to 2.0%, despite efforts by large state-owned banks to shore up long-dated yields via bond sales. (See MNI: Sluggish Economy To Hinder PBOC's CGB Interventions)

President Xi Jinping last week called on authorities to focus on the economy over Q3 and Q4 to “achieve the annual economic and social development goals," which means efforts to ensure growth will be strengthened. 

With the most recent indicators pointing to a possible GDP below the government's 5% annual target, the need for a further rate cut will increase should industrial profits turn negative again in the coming months.