China keeps lending rates steady; The market’s next move is to lower the reserve ratio

  • One Year LPR 3.65%, Five Year LPR 4.3%
  • The yuan surpassed 7 to the dollar
  • China-US government bond yield gap widens to two-month high
  • PBOC may cut RRR as next policy move – Analysts

SHANGHAI/SINGAPORE, May 22 (Reuters) – China left its benchmark lending rates unchanged for the ninth straight month in May on Monday, in line with market expectations, as a weakening yuan and yield differences with the United States limited the chance of a significant rate hike. .

A collection of data from the past month or so, including April indicators last week, pointed to the economy losing momentum after an initial post-Covid bounce and raised hopes of further easing measures.

But given the risks of capital outflows that could further hurt the sliding yuan, some analysts now expect the People’s Bank of China (PBOC) to reduce the amount of money it has to set aside as its next policy move.

Earlier in the day, China’s one-year lending prime rate (LPR) stood at 3.65%, while its five-year LPR stood at 4.30%.

In a Reuters poll of 26 market watchers conducted last week, 23 predicted no change in rates for this month.

Reuters Graphics

“Despite April’s weakness, the 5% GDP growth target remains within reach and we do not expect policymakers to unleash major stimulus as issues such as asset risks and youth unemployment require a more targeted approach,” Goldman Sachs economists said. Note.

“Within monetary policy, index actions such as a reserve requirement ratio (RRR) cut will be more likely than policy rate cuts this year given the already wide US-China interest rate differential and RMB depreciation pressure.”

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China’s yuan weakened to a psychologically important 7 per dollar last week and hit a five-month low. It was down 5% from its high in late January.

At the same time, the yield gap between China’s key 10-year government bonds and its US counterparts has widened over two months.

The stable LPR determinations came after the PBOC kept maturing medium-term lending facility (MLF) loans while keeping interest rates unchanged last week.

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

Economists at Capital Economics said last week that the central bank’s goal was to ensure that credit growth, which fell in April, did not reduce too much the “reopening stimulus to fade credit demand.”

“This can probably be achieved without policy rate cuts, which we think the PBOC will try to avoid,” they said.

“The downside of lowering LPR is that it reduces the returns on banks’ existing loan book, which adds pressure to their net interest margins, which are already very low.”

They said the PBOC could use other tools such as RRR cuts, deposit rate window guidance and liquidity injections to help reduce funding costs.

The LPR, which banks typically charge their best customers, is set by 18 designated commercial banks that submit proposed rates to the central bank every month.

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

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Reporting by Winnie Cho and Tom Westbrook; Editing by Tom Hogue

Our Standards: Thomson Reuters Trust Principles.

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