Focus on China’s lending rates as PBOC pledges more support

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(Bloomberg) – China’s banks will announce their benchmark lending rates on Wednesday, with many economists expecting a possible cut after the central bank boosted liquidity and made repeated calls on lenders to cut borrowing costs.

A slight majority of 9 of 16 economists polled by Bloomberg expect the one-year loan prime rate to be cut by 5-10 basis points from 3.7% when announced by the People’s Bank from China around 9:15 a.m. local time. Seven predicts no change. The rate is based on quotes that 18 banks offer to their best customers and submit to the central bank.

The PBOC has recently taken a number of steps to stimulate lending into the economy to help offset the economic damage from the Covid lockdowns. A reduction in the reserve requirement ratio this month will boost banks’ liquidity, helping them reduce borrowing costs. Another move by authorities urging banks to cut deposit rates – which lowers their funding costs – has also increased the likelihood of a lending rate cut.

“The prime lending rate is expected to be lowered after the RRR is reduced and banks are encouraged to lower the deposit rate ceiling,” said Ming Ming, chief economist at Citic Securities Co. “This will be an important driver for credit growth expectations.”

The five-year LPR, a benchmark for long-term lending including mortgages, is expected to fall to 4.55% from 4.6% according to nine of 13 economists in the survey.

The one-year LPR generally moves in parallel with the MLF rate, which remained unchanged last week. However, the lending rate was cut in December even without a prior cut in the MLF rate, after the PBOC cut the RRR by 50 basis points for most banks in the same month.

Economists also pointed to liquidity support from the PBOC’s transfer of 600 billion yuan in profits to the central government in mid-April, which the central bank said has the equivalent impact of a 25% cut. RRR basis points.

Top Chinese leaders have called on banks to sacrifice some of their profits to support the real economy hit by the worst Covid outbreak since the start of 2020. The PBOC also introduced several measures on Monday asking lenders to grant more loans.

Those expecting no change in the rate, however, say the RRR cut is too small – being 25 basis points for most banks instead of 50 basis points as expected – and too late to incentivize banks. to lower the LPR this month. .

The RRR will take effect on April 25, according to the PBOC, and will only release 530 billion yuan of long-term liquidity, less than the 1.2 trillion yuan released during the previous reduction in December.

Additionally, the PBOC may want to avoid a five-year LPR cut, so as not to over-stimulate the property market as part of the strategy that “housing is for living, not speculation,” analysts say. of CSC Financial Co.

The PBOC has shown restraint in providing monetary stimulus over the past week as economists have pointed to limiting PBOC actions to help an economy struggling with weak demand, production curbs and supply chain bottlenecks.

(Updates with timing of interest rate announcement in second paragraph.)

©2022 Bloomberg LP

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