No Change To Prime Rates Expected

LPR rate announcement: 0130GMT/0930HKT

• The PBOC is expected to keep benchmark lending rates on hold today. The 1-year rate is currently at 3.85%, while the 5-year tenor is currently 4.65%. This would be the ninth straight month of unchanged rates, as the economy recovers from the coronavirus shock.
• For the 1-year rate, of 24 analysts surveyed by Bloomberg 19 expect rates on hold while 5 expect a 5bps hike. A similar split is evident for the 5-year rate, 12 expect on hold at 4.65%, while 5 expect a 5bps hike.
• Data earlier in the week showed China's economy picked up speed in Q4. GDP data beat expectations and is poised to expand further this year, while industrial production data was also well above forecasts.
• With the economy seemingly back on track, some senior central bank officials have raised the topic of exiting loose monetary policies recently. This led to a stronger yuan, which saw the currency strengthen to levels the PBOC is said to be uncomfortable with. The yuan has retreated since then after Beijing took measures that would implicitly weaken the currency. Last week it was announced that mainland companies would be allowed to make more loans abroad.
• China injected the highest amount of short-term funds into the financial system since the end of 2020 yesterday, as demand for liquidity climbed ahead of the Lunar New Year holiday.
• The PBOC offered CNY 75bn of seven-day reverse repos after it drained liquidity for six consecutive days previously. The withdrawals have been small, which was seen as a signal the PBOC are reducing liquidity following large injections ahead of year end without hinting to markets they are preparing to tighten policy.
• The perception that the PBOC were considering tighter policy has faded in recent days. Chen Yulu, vice-governor of the PBOC, said last week that monetary policy would focus on maintaining necessary support for economic recovery. Yesterday the the head of the National Development and Reform Commission of the People's Republic of China (NDRC) said there will be no sudden shift in monetary policy in 2021.
• Market expectations for a steady LPR fixing in January are given conviction by the PBOC decision to keep MLF rates unchanged for the ninth month.