MNI PBOC WATCH: LPR To Hold, 2025 Easing Eyed
MNI (BEIJING) - China's Loan Prime Rate is likely to remain unchanged in December with more reductions to come over 2025 as the central bank strengthens easing to support the government's expansionary fiscal policies and cushion the impact of potential U.S tariffs.
The one-year LPR will be held at 3.1% and the five-year rate will remain at 3.6% this Friday. Both rates fell 25 basis points in October, their largest reduction since the reform of the new LPR pricing system in 2019. (See MNI PBOC Watch: LPR Cut To Guide Mortgages, RRR Easing Eyed)
The People Bank of China this year has maintained an accommodative stance, guiding the one-year LPR down by 35bp from 3.45%, while the LPR for loans over five years has fallen 60bp from 4.20%, the largest annual cuts on record.
The Central Economic Work Conference earlier this month adjusted the PBOC's monetary-policy stance to “moderately loosening,” dropping its 14-year long "prudent" bias, a significant shift that signalled more easing ahead. The conference also highlighted a "more proactive" fiscal policy and an increase to the deficit-to-GDP ratio. (See MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials)
MORE AGGRESSIVE EASING
The Bank pledged in a meeting after the CEWC to employ comprehensively the "use of various policy tools” and enact timely reserve requirement ratio and interest rate cuts to maintain adequate liquidity, and ensure that social financing, and money supply growth aligns with the government's economic targets and price levels.
During the previous period of "moderately loose" monetary policy between Oct 2008 to Sept 2010, the PBOC reduced deposit and lending rates four times and cut the RRR three times. Former PBOC officials have told MNI this easing cycle is likely to be even more aggressive, with two cuts to the 7-day reverse repo rate expected in Q1 and Q3 for a cumulative 30bp reduction.
More significant LPR cuts are also likely an option, while medium- to long-term liquidity shortfalls will prompt total RRR easing of 75-100bp. Reverse repos and treasury-bond trades will offset short-term gaps.
Zou Lan, head of the monetary policy department at the PBOC, said the policy shift will enhance “the responsiveness and flexibility of monetary policy” as global economic uncertainty grows and the domestic economy continues to face numerous difficulties. The PBOC will create a favorable interest-rate environment to support consumption and investment in 2025, foster suitable liquidity conditions for government bond issuance, increase government-bond trading operations and support proactive fiscal policy, he said.