MNI PBOC WATCH: China LPR To Remain Steady As Congress Meets

China’s reference lending rates are expected to be left unchanged this month after the People’s Bank of China kept the rate on its medium-term lending facility, which feeds into LPR pricing, steady on Monday.

The Loan Prime Rate for the 1-year and over-5-year tenors are expected to be maintained at 3.65% and 4.3%, respectively, as the panel of banks that provide LPR quotes account for the unchanged rate on the MLF, which provides a source of bank funding.

The ongoing 20^th National Party Congress in Beijing, which runs until Oct 22, is likely to be a consideration in keeping rates steady as China’s leadership seeks to avoid any move that may threaten market stability, sources told MNI. They said the release may be postponed. It is usually released on the 20^th of the month. Key economic data have also been delayed due to the Congress. (See MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans)

Keeping the LPR steady allows policymakers to assess the impact of cuts to reference rates so far this year, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. He noted that the average interest rate on corporate loans had dropped to a historic low.

“It is not urgent to cut the LPR even though it is still necessary to lower the rate in the over-five-year tenor,” Dong said.

However, a cut in the over-5-year rate cannot be ruled out. Banks may lower their 5-year LPR quotes after cutting their deposit rates last month, which lowered their cost of funding, said Golden Credit Rating chief macroeconomic researcher Wang Qing. A lower LPR would result in lower mortgage rates in the fourth quarter, he predicted. (See MNI STATE OF PLAY: China's 5-Yr LPR To Fall As Soon As October)

The PBOC rolled over CNY500 billion of a maturing one-year MLF at 2.75% on Monday. The bank drained funds over the previous two months by rolling over a smaller amount than the amount that was maturing.

Monday’s MLF operation was driven by the depreciation of the yuan against the U.S. dollar due to widening interest rate differentials between the U.S. and China, and improved credit demand after the MLF rate cut in August and a series of measures to stabilise the property market, said CITIC Securities chief economist Ming Ming.