China loan rate cuts ‘not over yet’ despite keeping lending benchmark unchanged in March

  • China’s one-year loan prime rate (LPR) remained unchanged at 3.70 per cent, the People’s Bank of China (PBOC) said on Monday
  • The five-year LPR, which is the reference for mortgages, also remained unchanged at 4.65 per cent

China kept its benchmark lending rate unchanged despite concerns over a cooling economy, the central bank confirmed on Monday, but further easing is expected.

The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – remained at 3.70 per cent at the March fixing.

The five-year LPR – which is a reference rate for mortgages – also remained unchanged at 4.65 per cent, according to the People’s Bank of China (PBOC).

Among 36 financial institutions surveyed in a snap Reuters poll last week, just over half said they expected China’s LPR and the five-year rate to remain unchanged.

It follows the US Federal Reserve raising its short-term benchmark rate last week to a target range of 0.25 to 0.5 per cent after two years of holding borrowing costs near zero to insulate the economy from the coronavirus pandemic.

“The current round of LPR cuts is not over yet, there is room for a reduction of 10 to 15 basis points in the second quarter,” said Wang Qing and Feng Lin, analysts with Golden Credit Rating International, on Monday.

They argued that China’s macro economic policy will still stick to a pro-growth stance, after a meeting of the Financial Stability and Development Committee chaired by Vice-Premier Liu He last week called for practical moves to boost the economy in the first quarter.

On Wednesday, Liu said China will roll out support measures to bolster its capital markets and steady economic growth following a massive stock sell-off driven by concern over coronavirus outbreaks, regulatory action and Russia’s invasion of Ukraine.

China is facing economic headwinds, including from resurgent coronavirus cases at home, a sluggish real estate market and rising geopolitical tensions and has set an economic growth target of “around 5.5 per cent” for this year.

Last week, it was reported that former central bank adviser Yu Yongding said China would further cut interest rates to stabilise the economy.

Wang and Feng said the so-called threefold pressure facing China’s economy has not eased, and that the main indicators, including investment, consumption and industrial production, were likely to fall in different degrees in March.

Policymakers are likely to take cut the reserve requirement ratio in the second quarter, which would then drive down interest rates, they added.

The LPR has been considered China’s de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s medium-term lending facility (MLF).

The PBOC had kept the rate on 200 billion yuan (US$31.44 billion) worth of one-year MLF loans to some financial institutions unchanged at 2.85 per cent last week, which had suggested it would hold off on a change to the LPR rate also.

It had been widely expected that the PBOC would lower the MLF rate for a second time this year, having already cut the rate from 2.95 to 2.85 per cent in January.

But the PBOC held off on the anticipated cut as headline economic data beat expectations, although analysts still said it was “only a matter of time” before policymakers took action to support the cooling economy.

The one-year LPR was cut for the first time in almost two years in December as the PBOC dropped the rate from 3.85 to 3.8 per cent.

It was again cut to 3.7 per cent in January before remaining unchanged in February.
The five-year LPR was also cut for the first time since April 2020 in January as the PBOC reduced the rate from 4.65 to 4.6 per cent.

Authors: Andrew Mullen, Orange Wang, SCMP

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