MNI PBOC WATCH: Data-Driven PBOC Cuts Could Push LPR Lower

The People’s Bank of China will be expected to announce a reduction in the benchmark 1- and 5-year Loan Prime Rates next week in line with surprise reductions to its minimum lending facility and reverse repo rates on Aug 15 following weak economic data.

Property market weakness will also be to the fore of PBOC thinking, with trouble at Country Garden, once China's largest property developer by sales, sending ripples through global markets, but officials will be conscious of the exchange rate, with both the offshore and onshore yuan trading close to the multi-year low 7.37 to the dollar hit just shy of a year ago. Though a weaker yuan could assist the export sector – as seen by the boost to Japanese exporters reaping the benefits of a lower yen in recent months -- Beijing has indicated that it will act to avoid excessive currency moves in either direction.

The new LPR rates are expected for Aug 21, with the 1-year rate currently at 3.55% and the 5-year -- seen as more relevant to the beleaguered property market -- at 4.20%.

INFLATION TURNS NEGATIVE

Still rate cuts alone would be no cure-all for the property market and advisors have told MNI that further action is also likely to be needed from monetary and macroprudential policy. (See MNI: PBOC To Support Local Govt Debt Sales, Advisors Say)

Tuesday's move came after the latest round of China inflation data saw consumer prices turn negative year-on-year, retail sales slow to a 2023-low, unemployment rise to 5.3% and property investment slump 8.5% y/y.

The surprise cuts Tuesday saw the MLF trimmed by 15 bps to 2.50% and the 7-day reverse repo rate by 10 bps to 1.80%. The PBOC cut both rates back in June and followed with cuts to the benchmark LPR rates just days later.