VIEW: SocGen: LPR Cut: Another Step In Serious, Restrained Easing Cycle

Societe Generale note that “the 1-year LPR was lowered by 5bp from 3.85% to 3.80% at the latest, while the 5-year LPR was left unchanged. LPR rates are the benchmark for bank loan rates. As defined, the 1-year LPR equals PBoC's 1-year MLF rate plus a premium decided by commercial banks. Hence, there can be two factors to drive down the LPRs: 1) an MLF rate cut; and/or 2) a decline in banks' funding costs. By this logic, we had expected a 10bp MLF rate cut to take place (in Q122) right before a 10bp LPR cut. Now in the absence of a MLF rate cut, the argument for this LPR cut should be the second factor.”

• “True, the PBoC lowered the RRR by 50bp (and some more) last week, but the resulted reduction in banks' funding costs was estimated by the PBoC to be CNY15bn /year, equivalent to ~0.01% (or 1bp) of the total outstanding of bank loans. Adding the RRR cut in August gives 2bp, and there have been very limited declines in interbank rates. Simply, we do not see enough incentives from PBoC's liquidity easing so far for banks to go for this 5bp LPR cut. Maybe it is because of the lack of incentives, it was only 5bp, not more. And the “premature” LPR cut clearly reflected policy intentions: the PBoC wants to provide more easing as it gets more concerned of the economic momentum like us. There should be no doubt by now that a serious (though still restrained) easing cycle is unfolding.”
• “However, the measures taken place so far -monetary, credit and fiscal - still do not seem enough for stabilizing the economic growth in the coming months, also considering several probable headwinds in H122 (Omicron, production/pollution caps around the Winter Olympics, export growth moderation and etc.). Hence, we continue to expect more.”