MNI PBOC WATCH: LPR To Hold, Market Cut Expectations Persist

China’s reference lending rate will likely remain unchanged in January following the central bank’s decision to keep its key policy rate steady and the fall of lenders’ interest margin to record lows, economists told MNI.

The loan prime rate (LPR), based on the rate of the People’s Bank of China’s medium-term lending facility (MLF) and quotes submitted by 18 banks, is expected to remain steady at 3.45% for the one-year maturity and 4.2% for the over five-year tenor on Monday.

The LPR will likely hold considering the PBOC’s decision to leave the MLF rate unchanged this month, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. Company and consumer loan rates have fallen to an historic low, which has hurt lender profits, he said. An unchanged LPR will stabilise interest margin and enhance banks’ capacity to support the economy further, he noted.

The central bank kept the one-year MLF rate unchanged on Monday at 2.5%, disappointing the market which had expected a reduction due to weak PMI and inflation. However, MNI has reported the central bank prefers to maintain a moderate stance this year and use more targeted measures to meet its “high-quality growth” requirement. (See MNI: China To Pursue Moderate Policy Support In 2024)

An advisor familiar with policy told MNI the PBOC had struggled to balance several mandates, including lowering funding costs of the real economy, stabilising banks’ interest margin to ensure financial-sector security and preventing sharp yuan depreciation. The bank will find achievement of the last two targets difficult at present, he warned.

Wang Qing, chief macroeconomic researcher at Golden Credit Rating, said policymakers need time to measure the effectiveness of the CNY350 billion injection via the Pledged Supplementary Lending facility, the additional CNY1 trillion China Government Bond issuance and the relaxation of home-purchace controls in major cities to boost demand and improve prices. (See MNI INTERVIEW: PBOC To Boost Targeted Facilities - Advisor)

The PBOC net-injected CNY216 billion of MLF into the interbank market on Monday and as much as CNY695 billion and CNY527 billion of 7-day reverse repos on Tuesday and Wednesday.

China Minsheng Banking Corp Chief Economist Wen Bin explained explained the moves indicated the Bank maintained ample liquidity to meet demand from company tax payments and CGB issuance, both of which drained liquidity from the interbank market.

The Bank could reduce policy rates should broad economic indicators weaken further over March or April, while it may also delay a cut to the reserve requirement ratio should arbitrage transactions rise due to the wide interest spread between bank loan rates and some financial products, Wen said.

EXPECTATIONS REMAIN

However, the market still expects an LPR cut. A bond trader at a major bank told MNI the possibility of a 5-10bp reduction remains considering lenders have lowered deposit rates by over 10bp on average since mid-December. This could push banks to reduce their LPR quotes, the trader argued.

An LPR reduction without an MLF cut would indicate the PBOC may aim to lower the real economy's funding costs but control capital prices in the interbank market to curb arbitrage, which will pressure bond markets, the trader continued.

The 10-year CGB yield dropped rapidly earlier this month to 2.4862%, its lowest since April 2020, due to expectations the PBOC would cut policy rates and the RRR this month.