China yesterday kept a benchmark lending rate unchanged, defying expectations for a reduction with the economy jolted by the COVID-19 pandemic, although policymakers would likely need to loosen lending rates soon to free up funds.
The one-year loan prime rate (LPR) was left unchanged at 4.05 percent from the previous monthly fixing, while the five-year LPR remained at 4.75 percent.
The surprise helped prop up the yuan against the US dollar, following heavy selling this week, as the interest rate gap between China and the US remained wide, following the US Federal Reserve’s surprise policy easing last weekend.
A majority of traders and analysts in a Reuters poll had expected the rate, which is used to price new loans, to come down given the massive coordinated stimulus unleashed by global central banks this week.
It did not suggest that authorities are broadly comfortable with the current policy settings for now, analysts said, after the central bank last week cut the amount of reserves commercial banks are required to hold.
However, many see the need for more policy easing soon as economic risks grow.
“The lack of any cut this month means that the LPR is still only 10 basis points lower than it was at the end of last year, following a small cut in February,” Capital Economics senior China economist Julian Evans-Pritchard said in a note.
“But with the economy unlikely to get back on track until next year, further monetary easing will be needed to help address the continued strain on corporate and households balance sheets,” he said.
The virus crisis has gradually stabilized in mainland China with no new domestic transmissions reported on Thursday for the first time, raising hopes that strict containment efforts to stop the spread of the virus are working.
However, the situation overseas remains concerning.
Major global investment banks and institutions downgraded their forecasts for the Chinese economy. Goldman Sachs cut its estimate for first quarter GDP to a year-on-year contraction of 9 percent from a previous forecast of 2.5 percent growth.
The LPR is a lending reference rate set monthly by 18 banks. The People’s Bank of China (PBOC) revamped the mechanism to price LPR in August last year, loosely pegging it to the medium-term lending facility rate (MLF).
The central bank left borrowing cost on its one-year MLF loans unchanged on Monday, which would ordinarily suggest the LPR would similarly remain unchanged.
However, investors and economists saw the wave of global rate cuts and liquidity measures this week as adding pressure for China to do likewise, which is why many had expected an LPR cut.
BNP Paribas senior China economist Jacqueline Rong said that while banks face pressure from authorities to provide credit to struggling businesses, they are unlikely to lower rates unless properly incentivized.
“Commercial banks already face higher pressure to lower borrowing costs for virus-hit firms and support smaller business this year,” she said. “Actively lowering LPR would inevitably give themselves more burden.”
That suggests the PBOC would need to cut the MLF soon to allow banks to lower their lending rates accordingly.
“We expect the central bank could lower MLF rate by 10 basis points in April,” Founder Securities chief economist Yan Se said. “And if fluctuations in the stock market pick up further, we can’t rule out chances for a reverse repo rate cut.”
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