China maintains key rate for 15th consecutive month

SHANGHAI (Reuters) – China kept its key rate for business and household loans unchanged in its monthly fixing on Tuesday, despite rising expectations of a cut after a surprise drop in bank reserve requirements.

FILE PHOTO: People walk in the Lujiazui financial district at sunset in Pudong, Shanghai, China July 13, 2021. REUTERS / Aly Song

The one-year loan prime rate (LPR) was maintained at 3.85%. The five-year LPR remained at 4.65%. The rate remained unchanged for the 15th consecutive month.

Eleven traders and analysts, or 52.4% of 21 participants, in a Reuters poll this week predicted no change in either rate, while the remaining 10 respondents all expected a reduction of the duration of one year.

The mixed expectations come as market participants question whether the central bank is adjusting the liquidity of the banking system or embarking on a broader easing cycle to stop an economic slowdown.

The People’s Bank of China (PBOC) has reduced the amount of liquidity banks must hold as reserves, freeing up about 1,000 billion yuan ($ 154.21 billion) in long-term liquidity to support its post-COVID economic recovery who was starting to run out of steam.

However, the central bank then kept the borrowing costs of the Medium Term Loan Facility (MLF), which serves as a guide for the LPR, unchanged in its last operation last week, when it partially rolled over the loans. maturing loans.

“As long as the MLF rate remains unchanged, there is no strong incentive for commercial banks to lower the LPR,” said a bond trader at a Chinese bank.

The LPR is a benchmark loan rate set monthly by 18 banks, which submit a monthly quote by adding a premium to the MLF rate.

Setting the LPR slightly higher than the MLF rate theoretically allows borrowers to access funds at rates that better reflect financing conditions.

“Any MLF rate cut will directly affect banks’ net interest margins, which is crucial for systemic financial stability,” Lu Ting, chief China economist at Nomura, said in an earlier note.

“We believe Beijing has no intention of squeezing bank margins further and will therefore be very reluctant to cut key rates. To counter the expected slowdown, Beijing is more likely to rely on fiscal measures and PBOC loans. “

A second trader at a Chinese bank said that “fluctuations in interbank money rates must affect the cost of borrowing in the real economy, not the other way around.”

Most of the new and existing loans in China are based on the one-year LPR. The five-year rate affects mortgage pricing.

($ 1 = 6.4846 Chinese yuan)

Reporting by Winni Zhou and Andrew Galbraith; Editing by Christopher Cushing and Sam Holmes


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