MNI PBOC WATCH: LPR Change Unlikely Despite Calls For Cut

China’s reference lending rate will likely remain unchanged this month, with banks having already cut loan rates under central bank guidance, and despite calls for a cut to boost credit demand and support economic recovery, policy advisors and economists told MNI

The People’s Bank of China will update the loan-prime rate Monday based on the PBOC’s Medium-term Lending Facility (MLF) rate and quotes submitted by 18 banks. The LPR's one-year maturity (3.65%) and the over-five- year maturity (4.3%) have remained unchanged since August 2022.

The PBOC kept the MLF rate steady this month and lenders’ loan rates have fallen at a faster pace than the LPR, suggesting a cut is unlikely, according to Wen Bin, chief economist at China Minsheng Banking Corp. Wen noted that while the one-year and over-five-year LPR have been cut by 15bp and 35bp since 2022, the general loan rate has dropped by 62bps and the mortgage rate has slumped over 100bps as of the end of 2022.

A lower LPR would also further weigh on lenders’ interest margins, which has led the PBOC to call on some banks to lower deposit rates to support lower borrowing costs and guide more capital into the real economy, Wen said. He added, however, that a reduction in policy rates should not be ruled out should economic indicators continue to send weak signals. (See MNI: China Faces H2 Headwinds As Consumption Weakens)

DISSAPPOINTING APRIL

China’s economic performance in April disappointed, raising concerns over the sustainability of recovery. According to the National Bureau of Statistics, both industrial output and investment fell last month from March. Output slipped 0.47% m/m while investment declined 0.64%. Retail sales also rose below expectations, gaining 0.49% m/m compared with 0.78% in March.

Zhang Bin, senior fellow at the Institute of World Economic and Politics at the China Academy of Social Science, called on the central bank to cut policy rates more rapidly to lower investment costs and reduce the cost of servicing debt as the economy struggles to recover from Covid-19.

A 100bp cut to key policy rates could increase household, nonfinancial company and government spending by CNY917 billion, Zhang said. The multiplier effect would add 1.2pp to the current nominal GDP growth rate of around 5.2%, while more aggressive easing would also depreciate the yuan, boosting exports, he said.

PRUDENT STANCE

However, the central bank flagged a prudent stance in its latest Monetary Policy Report, highlighting the need for precise, appropriate and stable efforts in light of its optimistic view on economic recovery.

Cui Huiru, banking analyst at Fitch Ratings, said the report showed the PBOC would likely hold off from cuts as both corporate and mortgage loan rates were at low levels and capital outflow pressure was still great, especially if the U.S. Federal Reserve continues to hike.

She said authorities would adjust monetary and fiscal policies according to need, particularly regarding the GDP growth target of around 5%. The government may have to boost investment should consumption recovery prove soft or insufficient, she continued.