MNI PBOC WATCH: LPR To Remain Unchanged, H2 RRR Cut Possible

China’s reference lending rate will likely remain unchanged in July, however, the central bank could cut the reserve requirement ratio in H2 thanks to poor Q2 economic performance and increasing medium-term lending facility maturities, economists told MNI.

The Loan Prime Rate (LPR) – based on the People’s Bank of China’s MLF rate and quotes submitted by 18 banks – will likely remain steady at 3.55% for the one-year maturity and 4.2% for the five-year plus tenor on Thursday, they said.

The PBOC kept the MLF rate steady on Monday, while the LPR was lowered by 10bp in June, making a July change unlikely, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. He predicted the Bank would cut reserve requirement ratios by 25bp in Q3 to lower lenders’ funding costs and send the market a positive signal as the economic and financial situation weakens.

LPR, particularly the five-year tenor, would likely fall without an MLF rate cut later this year should the PBOC unveil an RRR cut, he said. Lenders typically use five-year LPR as the benchmark on new mortgage rates.

According to the National Bureau of Statistics, China’s GDP expanded by 6.3% y/y in Q2, lower than the 7% market estimate and prompting equity and forex market selloffs on Monday. (See MNI BRIEF: China Q2 GDP Up 6.3% Y/Y, Slower Than Expected)

POLICY ENHANCEMENTS

Zhang Xu, analyst at Everbright Securities, said the PBOC will ensure credit expansion, likely leading the central bank to cut RRR in a bid to unlock long-term interbank liquidity.

The government will also increase spending to shore up the economy over the remainder of the year, while local governments have already started accelerating debt issuance since June, which will require more liquidity support, said Wen Bin, chief economist at China Minsheng Banking Corp, pointing to the PBOC’s CNY3 billion one-year MLF net injection on Monday.

The PBOC’s MLF move this week was the seventh consecutive monthly liquidity net injection and a nod to markets that it would “keep liquidity ample,” according to analysts. Wholesale market rates also remain low. The weighted-average rate of the 7-day repo rate (DR007) stood at 1.85% on Monday, lower than its PBOC benchmark at 1.9%.

As more MLFs mature and the economy stabilises, MLF injections will likely increase, alongside an RRR cut, to push credit expansion, Wen said. The PBOC will focus on guiding down of the rate of outstanding mortgages, to ease the household sector’s debt burden, Wen noted. Meanwhile, the central bank could also introduce deposit-rate reductions and structural tools to hedge the decline in bank profits, he added.