MNI PBOC WATCH: MLF Rate Cut In Sight After Repo Move

The People’s Bank of China will likely cut its medium-term lending facility rate this week, guiding the main reference lending rate down, in order to shore up the weak economy and boost credit demand, advisors and economists told MNI.

The central bank cut the 7-day reverse repo rate by 10bp to 1.9% on Tuesday, the first such move since last August, further fueling speculation over an MLF rate cut this Thursday. (See MNI: PBOC Rate Cut Expectations Build After Deposit Cuts).

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company, told MNI the repo rate reduction signaled the central bank would lower policy rates and that this was “necessary and urgent” considering the unstable recovery, shaky market confidence and soft expectations. He noted that some small companies are struggling and consumer prices continue to weaken below expectations.(See MNI: Weak Price Data Adds To Rate Pressure On PBOC- Economists)

Dong expected a 10bp MLF cut this Thursday and also a 5-10bp reduction in the Loan Prime Rate next Tuesday, in what would be the first change to that rate in nine months in order to reduce lending rates to the real economy and support home purchases.

An advisor who asked for anonymity agreed an MLF rate cut was likely. The LPR will also be reduced, possibly by more than 10bp this month, as it is pegged to the MLF and cuts in banks’ deposit rates have reduced lenders' funding costs.

BANK DEPOSIT RATES

This week, more joint-stock banks lowered deposit rates, following similar moves by state-owned banks last week. The advisor said there will be room for even lower deposit rates exists if credit demand remains weak, noting deleveraging in the household and business sectors. Authorities should respond with coordinated fiscal, property market and industrial policies in addition to monetary easing, the advisor argued.(See: MNI BRIEF: China New Loans Rise in May, Below Expectations)

Liang Si, a researcher at the Bank of China, said the 7-day repo rate serves as an “actual floor” for money-markets rates in the PBOC’s rate corridor model. A lower 7-day repo rate will lead to a general reduction of policy rates, he noted.

Credit demand has softened as bank-bill rates have remained low since March and the rate gap between bank bills and negotiable certificates of deposit has widened since the end of May. A lower loan interest rate will help boost borrowing demand for the real economy and shore up H2 performance, Liang added. (See MNI: China Faces H2 Headwinds As Consumption Weakens)

Yan Yuejin, director at E-house China Research and Development Institution, told MNI that the probable LPR cut will guide down mortgage rates and boost a sluggish real-estate market.

Following the rate-cut announcement, the yuan depreciated swiftly against the U.S dollar. USDCNH rose over 200pps to CNH7.1735 while USDCNY increased to CNY7.1639 in the early trading session on Tuesday afternoon.

Wang Qing, analyst at Golden Credit Rating International, said the rate cut indicates the PBOC can remain policy independent as Chinese inflation diverges from that in other major global economies. While moving to shore up economic performance in H2, the central bank has ample tools to curb any overshooting of the yuan and avoid excessive exchange rate weakness, Wang added. (See MNI INTERVIEW: Yuan Within Wider Band- Former SAFE Official)