MNI PBOC WATCH: Deposit Rate Cut Needed Before LPR Reduction

Lenders’ narrowed interest-rate margin and the volatile yuan will continue to restrain the pace of policy rate cuts unless deposit rates fall and reduce pressure on bank profits, economists told MNI.

The Loan Prime Rate (LPR), based on the rate on the People’s Bank of China’s medium-term lending facility (MLF) and quotes submitted by 18 banks, held steady for the third consecutive month on Monday at 3.45% for the one-year maturity and 4.2% for the over-five-year maturity, in line with expectations. (See MNI PBOC WATCH: Major MLF Injection Lowers RRR Cut Possibility)

Policymakers do not want to lower loan rates too far, noted Wen Bin, chief economist at China Minsheng Banking Corp, pointing to the PBOC’s desire to maintain lenders’ interest-rate margins and profits at reasonable levels, particularly as bank loan interest rates fall and wholesale funding remains expensive.

Appetite for an LPR reduction will stay low in the short term while lenders are tasked with offering cheap loans to extend maturing local-government debt, which will continue to pressure profits at a time when authorities want to ensure financial-system stability, he added. The central bank will likely make good use of interbank market liquidity rather than conducting significant easing, while the yuan’s weakness will also reduce the possibility for further policy-rate reductions, Wen continued.

YUAN PERFORMANCE

An advisor told MNI further monetary-policy easing will depend on exports and the improvement of Sino-U.S relations, noting the difference between Chinese and U.S. rates would curb any policy-rate reduction.

Both onshore and offshore yuan jumped on Monday following a largely positive meeting between Presidents Xi Jinping and Joe Biden last week, a softening U.S. dollar and the PBOC’s strongest CNY fix since August.

Tan Yaling, head at the China Foreign Investment Research Institute, noted the currency could rise to about 7.15 against USD amid the improved sentiment in the short term, but it may fall back to 7.28 later this year.

DEPOSIT RATE

Economists told MNI a lower LPR in future was possible should the PBOC further guides the deposit rate lower, which will decrease pressure on bank funding costs.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, said the central bank could lower the over five-year LPR by 5bps to boost the real-estate and corporate loan market, while the deposit rate should be reduced at an appropriate pace.

According to Choice, a Chinese financial data provider, over 10 medium and small banks have announced to lower the deposit interest rate by 5-35bps so far this month, following moves by major state-owned banks in September.

The advisor said there was room for a lower deposit rate considering CPI declined in October and M1 growth dropped to 1.9% y/y last month from 6.7% at the start of the year, which illustrated the economy’s sluggish recovery – particularly in the housing market – and would necessitate lower policy rates.