MNI PBOC WATCH: China To Keep LPR Steady, Q4 Rate Cut Eyed

China’s reference lending rate will likely remain unchanged in September, but uncertainty over economic performance and real-estate sector recovery is increasing expectations of a policy rate cut in the fourth quarter, economists told MNI.

The loan prime rate (LPR), based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 18 banks, will likely hold at 3.45% for the one-year maturity and 4.2% for the over-five-year tenor on Wednesday.

While the PBOC’s decision to reduce the reserve requirement ratio (RRR) last Thursday has fueled market chatter of an LPR cut, economists see little chance of it happening.(see:MNI BRIEF: PBOC Cuts RRR By 25bp To Support Recovery)

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, told MNI the central bank will likely cut its policy rates next quarter should Q3 GDP – due Oct 18 – print below expectations.

China Minsheng Banking Corp chief economist Wen Bin, meanwhile, noted the 25bp RRR cut will not be enough to incentivise lenders to lower their LPR quotes as their interest margins remain wide. The cut will reduce bank lending costs by CNY4.4-4.9 billion and inject CNY500-560 billion of long-term liquidity into the interbank market, he said.

The PBOC noted it would implement prudent monetary policy at a “precise and forceful pace” in the statement announcing its RRR cut, a phrase repeated from its August decision when it reduced the one-year LPR less then its 15bp MLF reduction. Wen said this showed the central bank remained hesitant to guide the LPR down.

The PBOC held the rate of one-year MLF steady at 2.50% on Friday. (See MNI: PBOC Cuts 14-Day Reverse Repo Rate, MLF Rate Unchanged)

WEAK RECOVERY

Recent economic indicators have pointed to an improvement in August following July’s weak performance, with retail sales, industrial output and manufacturing investment beating expectation. However, property and private investment have lagged, according to National Bureau of Statistics data. In addition, long-term household and business-sector credit softened last month, while PMI contracted.

Tu Qiang, senior analyst at Shenwan Hongyuan Securities, said authorities must provide further policy easing to boost house purchases and bolster property investment this year and into 2024. He predicted authorities would guide down the one-year LPR 10bp and the five-year-plus LPR 5bp sometime in Q4.

Wen agreed Q4 would see a rate cut to stimulate investment and consumption. Authorities will also ramp up efforts to dispose of local government debt, which will also require PBOC support, he added.

AMPLE LIQUIDITY

Liquidity conditions have remained moderately tight since mid-August with the seven-day reverse repo rate of depository institutions (DR007) jumping to 2.2% at the end of August. The rate has averaged 1.88% so far in September, higher than the PBOC’s 1.8% benchmark.

Dong attributed the tight liquidity to growing local-government debt, company tax payments and quarterly lender regulatory assessments, factors which drove the RRR cut.(See MNI PBOC WATCH: PBOC to Hold Key Rates, But RRR Reduction Eyed)

Thursday’s RRR reduction, which usually takes effect 10 days after the announcement, was implemented the next day – an unexpected move. Dong said this showed the PBOC would not hesitate to maintain benign liquidity conditions in the interbank market.