MNI PBOC WATCH: China Feb LPR To Remain Stable
MNI (BEIJING) - China's Loan Prime Rate is likely to remain unchanged in February as low inflation diminishes the effectiveness of traditional policy easing methods and lending stagnates, while ensuring the yuan's stability will also restrain the central bank.
The one-year LPR is currently at 3.1%, while the five-year rate sits at 3.6%. Authorities last reduced both maturities by 25 basis points in October, the largest cuts since the reform of the new LPR pricing system in 2019. (See MNI PBOC WATCH: Rate Cuts Eyed For Further Economic Momentum). The central bank will announce the LPR result on Thursday.
Policy advisors concerned about the effectiveness of reserve requirement ratio and interest-rate reductions have suggested fiscal authorities should boost stimulus and work closer with monetary policy, alongside greater efforts to boost the stock market to raise assets prices, encourage spending and shore up confidence.
Sun Lijian, director of the Financial Research Center at Fudan University in Shanghai, told MNI that China's current challenge was not a lack of funds, but rather a shortage of effective circulation. Lowering interest rates and increasing money supply are relatively ineffective in stimulating demand at a time when market confidence remains weak, and both businesses and households are more inclined to save and repay debt, he noted. (See MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market)
Sun, who advises both the PBOC and the Shanghai municipal government, called for the People's Bank of China to expand its facilities to support the stock market and flag “asset prices stability” as an intermediate policy objective.
China must oversee three interconnected systemic risks in order to avoid stagflation, including a hard landing in the real-estate market, and manage debt defaults by local government funding vehicles and liquidity risk arising from the long-term maturity mismatches in small- and medium-sized financial institutions, he warned.
PBOC FOCUS
In its latest Monetary Policy Report issued last week, the Bank reiterated it would make “the promotion of a reasonable price recovery” an important consideration. The central bank said it would optimise policy intensity and pace according to domestic and international economic conditions and the operation of financial markets based on its assessment that China's economy would maintain stable growth in 2025 as global risks rose.
Yu Yongding, a former MPC member of the People’s Bank of China, said greater fiscal support can help maximise monetary-policy effectiveness and reduce liquidity-trap risk, suggesting authorities should lift the deficit-to-GDP ratio up to 5% or higher from the current 3% level to ensure 5% economic growth this year amid weaker exports and tariff uncertainty.
A higher deficit ratio, which will boost demand for loans and increased government-bond issuance, is likely to drive up 10-year yields and elevate the overall economic yield curve, and the central bank could cut RRR and increase the scale of its bond-buying programme should government-bond issuance drive market interest rates higher, Yu explained.