MNI PBOC WATCH: Easing Takes Backseat To Relending Focus
MNI (BEIJING) - Lenders' narrowed interest margins and the U.S. Federal Reserve's slower easing pace will make further cuts by the People’s Bank of China less necessary in the short term, with the central bank instead choosing to support key sectors via reduced rates of its relending tools.
The Loan Prime Rate remained unchanged as expected on Thursday at 3.1% for the one-year maturity and 3.6% for the five-year and over rate. (See MNI PBOC WATCH: LPR To Hold On Economic Recovery) Both benchmarks were last reduced by 25 basis points in October 2024, the largest cuts since the reform of the LPR pricing system in 2019, following the PBOC’s 20bp reduction to its 7-day reverse repo rate in September.
A lower interest rate would further widen the China-U.S. spread, following the Fed's decision to hold steady this week, and pressure the yuan, which has strengthened recently due to a softer dollar and improved A-share market sentiment. (See MNI: PBOC Persists With Yuan Support For Now-Advisors)
Banks' persistently narrow net interest margin (NIM), which fell to a new record low of 1.52% in Q4 and below the 1.80% warning level, will also make the central bank more cautious, despite the Government Work Report this month reaffirming Beijing's preference of "timely reserve requirement ratio and interest rate cuts."
Economic performance and the external trade environment will also greatly influence the PBOC's easing timeline.
TARGETED TOOLS
While a broad interest-rate cut remains less urgent, the Bank's focus will likely shift to cheaper, targeted relending tools. Governor Pan Gongsheng told reporters during this month's Two Sessions meetings that room existed for further reductions in the interest rates of structural monetary tools provided to commercial banks.
The PBOC run Financial News reported last Friday – citing market experts – that lowering relending rates can help banks maintain a relatively stable net interest margin while increasing support for the economy by promoting lower financing costs for businesses and households.
At present, the central bank has several relending tools for key sectors, including for agriculture and small businesses, technological innovation, industrial upgrades, and affordable housing. PBOC officials have also recently highlighted plans to introduce a tool supporting consumption.