MNI PBOC WATCH: LPR To Fall In 2024, After Policy-Rate Cuts

China’s benchmark lending rate will likely fall in 2024 following the central bank’s cut to key policy rates, but any reduction will be moderate and its impact on the economy low as credit demand remains weak, economists and analysts told MNI.

The loan prime rate (LPR), based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 18 banks, remained unchanged for the fourth consecutive month at 3.45% for the one-year maturity and 4.2% for the over-five-year tenor on Wednesday. The pause was in line with expectations. (See MNI PBOC WATCH: LPR To Hold As CGB Liquidity Pressures Lenders)

Ming Ming, former PBOC official and chief economist at CITIC Securities, noted the central bank in 2024 will follow the tone set by the recent Central Economic Work Conference and support fiscal and industrial policies, ensure ample liquidity and lower financing costs. The LPR will likely fall in 2024 as the PBOC may cut its policy rates in Q1 and Q3 and reduce the RRR up to two times, he added.

The steady MLF rate and higher borrowing costs impacting lenders drove Wednesday decision to hold the LPR, and RRR cuts could occur this month or in January thanks to the significant liquidity gap as cash demand grows into year end and government bond issuance increases, Ming commented.

The PBOC has cut the one-year MLF rate twice this year by a total of 25bp, while the 7-day reverse repo rate has fallen by 10bp, leading to a 20bp one-year LPR reduction and a 10bp fall for the over-five-year tenor.

LPR CUTS QUESTIONED

An advisor to the central government said room for further LPR and new loan interest-rate cuts in 2024 had narrowed. Some loan rates were lower than deposit products, which had encouraged arbitrage, and will lead the central bank to guide down deposit rates or enhance lenders’ macro-prudential assessments to push down small bank long-term funding costs, the advisor noted. (See MNI: China To Pursue Moderate Policy Support In 2024)

In addition, some tier-one cities – such as Beijing and Shanghai – have lowered mortgage rates, which will support the housing market and reduce the need to cut the five-year LPR, he said.

Wang Qing, chief macroeconomic researcher at Golden Credit Rating, said slow and small cuts to loan interest rates will have limited effect on company and household credit demand. Supporting the property market and promoting confidence and investment in the private sector remained the more important task ahead for authorities, Wang added.

Both the U.S. Federal Reserve and the European Central Bank will likely turn dovish next year, relaxing external pressure on the PBOC to ease, Wang commented, predicting the central bank will likely cut the MLF once to guide down the LPR.