China keeps lending rates steady; The market sees lowering the reserve ratio as the next step

  • One-year LPR at 3.65%, five-year LPR at 4.3%
  • Hacked 7 yuan per dollar
  • The Sino-US government bond yield gap is the widest in two months
  • The People’s Bank of China (PBOC) could cut the equity interest rate with its next policy move – analysts

SHANGHAI/SINGAPORE (Reuters) – China kept its benchmark lending rates unchanged for the ninth month in May on Monday, in line with market expectations, as a weaker yuan and widening yield differentials with the United States limited the scope for any significant monetary easing. .

A raft of data over the past month or so, including last week’s April indicators, indicated the economy was losing momentum after its initial post-COVID bounce and raised hopes for more easing measures.

But given the risks of capital outflows that could hurt further from a slide in the yuan, some analysts now expect the People’s Bank of China (PBOC) to cut the amount of cash that banks must set aside with its next policy move.

Earlier in the day, China’s one-year loan prime rate was kept at 3.65% and the five-year prime rate was unchanged at 4.30%.

In a Reuters poll of 26 market observers last week, 23 observers expected no change in prices for this month.

Reuters graphics

“Despite the weakness in April, we don’t expect policymakers to unleash significant stimulus as the 5% GDP growth target remains within reach, and issues such as property risks and youth unemployment require an approach,” Goldman Sachs economists said in a press release. more targeted. NB.

“Within monetary policy, symbolic measures such as lowering the reserve requirement ratio (RRR) are likely to be more likely than policy rate cuts this year given the already wide interest rate differential between the US and China and the devaluation pressure of the yuan.

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The Chinese Yuan weakened, breaching the psychologically important level of 7 for the dollar last week to hit a five-month low. It has fallen by about 5 percent from its peak in late January.

Meanwhile, the yield gap between China’s benchmark 10-year government bonds and their US counterparts is hovering at the widest level in two months.

The steady LPR fixations also came after the People’s Bank of China (PBOC) rolled over the outstanding Medium Term Lending Facility (MLF) loans while keeping the interest rate unchanged last week.

The MLF rate acts as a guide to the LPR and the markets often use the medium term rate as a precursor to any changes in lending standards.

Economists at Capital Economics said last week that the central bank’s goal is to ensure that credit growth, which eased in April, does not slow too much as “the push to reopen demand for credit fades.”

“This can probably be achieved without interest rate cuts, which we believe the People’s Bank of China will try to avoid,” they said.

“The downside of cutting the LPR is that it reduces banks’ yield on their existing loan book, which puts more pressure on their net interest margins, which are at a record low.”

They said the People’s Bank of China may use other tools such as deposit rate cuts, deposit rate window guidance and liquidity injections to guide funding costs down.

The LPR, which banks usually charge to their best customers, is set by 18 designated commercial banks who submit suggested rates to the central bank each month.

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Most new and outstanding loans in China are based on a one-year LPR, while the five-year rate affects the pricing of mortgages. China lowered both LPRs in August 2022 to boost the economy.

(Reporting by Winnie Zhou and Tom Westbrook) Editing by Tom Hogg

Our standards: Thomson Reuters Trust Principles.

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