MNI POLICY: PBOC Keeps Dec Loan Prime Rate Unchanged

China's central bank maintained its key loan rate unchanged Monday for the eighth month in a row as it aims to normalize monetary policy with the economy on track and debt pressures increasing.

The December Loan Prime Rate, the benchmark to set companies' cost of borrowing, remains at 3.85% for the one-year maturity and at 4.65% for the five-year maturity. The move was expected by policy advisors and market analysts as the People's Bank of China held its Medium-Term Lending Facility rate at 2.95% on Dec. 15. The LPR is linked to the one-year MLF, which is viewed as being closer to market rates.

However, advisors and analysts predict the central bank will maintain ample liquidity in coming days in the inter-bank market as cash demand is rising for the week-long Chinese New Year holiday, and the approaching macro-prudential assessment by the PBOC.

The central bank has net injected CNY350 billion in MLF this month, the fifth month of net injection in a row, according to Wind. The Central Economic Working Conference last week noted the macro policy would not impose a "sudden U-turn" next year, which is interpreted by advisors that the policy normalization would be carried out at a gradual and careful pace.

Han Wenxiu, a high-ranking official, said over the weekend that the GDP growth will average about 5% over 2020 and 2021.

So far this year, the PBOC has cut 30 bps off the one-year LPR and 15 bps off the five-year. In April, following a 6.8% contraction in Q1 GDP, the PBOC cut the one-year LPR by 20 bps and the five-year LPR by 10 bps, the biggest cuts since the LPR mechanism reform in August 2019.