VIEW: ANZ: PBoC May Cut The MLF Rate

ANZ note that “China’s policymakers proposed to “optimise the central bank policy rate system” at the People’s Bank of China (PBoC)’s Q4 monetary policy committee meeting (MPC) in December 2021. We believe this signals the possibility of a 10bp cut in the 1-Year medium term lending facility (MLF) rate.”

• •“The cut in the loan prime rate (LPR) in December shows that the market has been ahead of the policy decision already. The 1-Year MLF, which is currently at 2.95%, seems too high to be a medium-term rate pivot for bank asset pricing, because China’s new asset management rules have brought about structural changes to banks’ liabilities, in our view.”
• •“Furthermore, China’s policy stance has shifted to growth stabilisation. The optimisation of the policy rate system will help to transmit liquidity that has accumulated in the banking system to the real economy. Aggregate financing will pick up to 11.5% Y/Y in H1 2022. The credit impulse will propel growth momentum from the middle of the year.”
• •“However, China’s bond market will enjoy little upside. We continue to see 10-Year CGB yields trading within the range of 2.70-3.00% as the PBoC will likely maintain the 7-day reverse repo rate at current levels and conduct open market operations cautiously.”