MNI PBOC WATCH: LPR Cuts Possible Despite Steady MLF

China’s reference lending rate will likely fall this month following the central bank’s reduction of the reserve requirement ratio and some relending rates to lower lenders' funding costs, and despite the medium lending facility rate holding steady.

The Loan Prime Rate, based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 20 banks, could fall 5-10 basis points on Tuesday from the current 3.45% for the one-year maturity and 4.2% for the over-five-year maturity. However, the five-year tenor could fall by 5bp alone and the one-year rate left unchanged to help guide down mortgage rates and boost long-term corporate loans.

The central bank kept the one-year MLF rate unchanged at 2.5% and injected a net of CNY1 billion into the interbank market on Sunday, the first working day after the week-long Chinese new year holiday. However, lenders may still reduce their LPR quotes despite the PBOC’s move.

ECONOMIC HEADWINDS

Disinflationary pressure has continued to impact China’s economy, with the consumer price index falling to a 14-year low of -0.8% y/y from December’s -0.3%, more than the market’s expectation of -0.6%. The result followed the PBOC's 50bp RRR cut in late January, aimed at injecting about USD150 billion into the banking sector.

China’s authorities have also begun upping their support in other areas of the economy. Local governments have set lofty GDP targets, which could lead to higher central government borrowing, (see MNI: High Local Targets Hint At Further China Gov. Leverage) while China’s tier-one cities have also started loosening buying restrictions to help support the property market. (See MNI: China's Mega Cities To Ease Homebuying Limits Progressively)

PBOC GUIDANCE

PBOC Governor Pan Gongsheng said last month during a press conference that reductions to re-lending and rediscounting rates to support agriculture and small businesses, the RRR cuts, alongside lenders lowering deposit rates will drive the LPR down. The comments were taken as a positive signal to moderate the economy’s overall funding costs via a lower LPR.

The PBOC’s latest Monetary Policy Report issued on Feb 8 reiterated Pan’s stance, noting the Bank wanted to enhance the management of LPR quotations and reduce the overall cost of social financing to shore up the economy which faced headwinds as consumer confidence and private investment remained weak.

Deposit rates will also likely continue to fall to support lenders’ interest margin and ensure they can offer cheaper loans, according to the report, which noted the Bank will further advance the deposit interest rate market-oriented reform to drive the overall decline in interest rates and maintain reasonable credit growth. (See MNI PBOC WATCH: Deposit Rate Cut Needed Before LPR Reduction)

Last December, major commercial banks, represented by Industrial and Commercial Bank of China (ICBC), lowered their interest rates on a range of term deposits by 10-25bp.