MNI PBOC WATCH: More RRR Cuts Seen To Keep Liquidity Ample

China's reference lending rates is expected to be held steady over coming months, but the People’s Bank of China will provide ample liquidity to allay any concerns about spillover effects from the banking turmoil triggered by the collapse of Silicon Valley Bank and sale of Credit Suisse, economists and analysts said.

The loan prime rate (LPR), based on the rate on the PBOC’s medium-term lending facility (MLF) and quotes submitted by 18 banks, remained at 3.65% for the one-year maturity and 4.3% for over-five-year maturity on Monday, according to the PBOC’s website. This was in line with expectations and marked the seventh consecutive month the key rate was held steady. (See MNI PBOC WATCH: LPR On Hold Amid Rebound; Alert To SVB Fallout)

The LPR is likely remain unchanged next quarter given interest rates on general bank loans and corporate loans dropped to a historic low in December, with rising wholesale funding costs and expanding credit restraining the ability of banks to lower their LPR quotes, while the PBOC has limited room to cut policy rates, said Everbright Securities analyst Zhang Xu. He said the fact that inflation-adjusted loan rates were lower than China's potential growth rate was a positive for debt sustainability.

However, the PBOC will retain an accommodative stance in offering adequate liquidity to ensure a sustainable economic recovery and to soothe market nerves amid the fallout from the collapse of Silicon Valley Bank and the rushed sale of Credit Suisse.

RRR Cut

The PBOC unexpectedly cut the reserve requirement ratio by 25bps last Friday to offer long-term liquidity, which was interpreted as a response to turmoil in the U.S. and European banking sectors. The 25bps cut was estimated to unlock over CNY500billion of liquidity and to have lowered lenders’ costs by CNY6 billion.

The spillover risk from SVB and CS was one reason why the PBOC reduced the RRR, said Li Chao, chief economist at Zheshang Securities. Additionally, the cut reflected the State Council’s edict that policy to support the recovery should be front-loaded to enhance policy coordination and stabilise growth in total social finance.

The RRR cut should reduce any possible liquidity shock caused by the overseas banking turmoil, said China Merchants Securities analyst Liao Zhiming.

The PBOC may cut the RRR by up to two times this year should the economic recovery slow or overseas banking problems worsen, analysts predicted.

PBOC deputy governor Xuan Changneng said at forum on Saturday that problems exposed at U.S. and European banks showed the rapid shift in monetary policy in major economies was generating spillover effects, sparking concerns about the wider impact.