China set to hold lending benchmarks steady in May, survey shows

China set to hold lending benchmarks steady in May, survey shows
FILE PHOTO: Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang

SHANGHAI/SINGAPORE : China is expected to leave lending benchmarks unchanged at a monthly fixing on Monday, a Reuters survey showed, as the cost of medium-term policy loans was kept steady, while the yuan currency faced renewed downside pressure.

The loan prime rate (LPR) normally charged to banks’ best clients is calculated each month after 18 designated commercial banks submit proposed rates to the central bank, the People’s Bank of China (PBOC).

But 23 of 26 market watchers polled, or 88 per cent, predicted no change to either the one-year LPR or five-year tenor.

Two of the remaining three forecast a marginal cut in the five-year LPR, while the third expected a cut of 5 basis points in both rates.

The strong expectations of steady LPRs in May followed the PBOC’s rollover of maturing medium-term lending facility (MLF) loans keeping the interest rate unchanged this week, traders and analysts said.

But markets expect monetary easing in coming months to support the economic recovery in the wake of the re-opening from stringent COVID-19 measures.

The MLF rate serves as a guide to the benchmark LPR, with markets using the medium-term rate as a precursor to changes to the lending benchmarks.

“We have been highlighting the rising probability of cuts to benchmark lending rates, and now we make it our base case,” said Ting Lu, chief China economist at Nomura.

“We now expect 10-basis-point cuts to the MLF rate and LPR in mid-June,” the economist added.

“As China’s economy moves out of the post-COVID sweet spot, Beijing may have to introduce other supportive measures, including adding transfers to local governments and state-owned enterprises (SOEs) via its policy banks.”

A slew of April economic data showed that recovery might have started to lose steam.

“Given Q1 GDP has exceeded expectation, policymakers may react with a lag,” said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas.

“Judging from last year’s pace, it probably won’t do a cut immediately, although in the second to the third quarter, there is chance for a symbolic cut, as long as banks are facing deposit rate cut pressure and credit demand is weak.”

Traders said expectations of imminent easing were also dampened by a weakening yuan, which has breached the psychologically important level of seven to the dollar, to reach five-month lows this week.

Analysts said chances of a near-term rate cut this month diminished after separate comments by the central bank this week that it would keep liquidity reasonably ample and interest rates reasonable and appropriate.

“I maintain my view that the PBOC is unlikely to significantly adjust the policy rates this year,” said Marco Sun, chief financial market analyst at MUFG Bank (China).

Authorities’ efforts to stimulate consumption showed that regulators are “focused on the recovery by using other tools,” Sun added.



Source: Reuters