MNI PBOC WATCH: Dec LPR To Hold, OMO Readied For Rising Demand

China’s Loan Prime Rate is likely to remain unchanged in December, while the central bank prepares for rising cross-year liquidity demand by restarting 14-day reverse repo operations.

Authorities are expected to hold the LPR at 3.0% for the one-year maturity and 3.5% for the five-year tenor and over on Monday. Both rates were cut by 10 basis points in May after the People’s Bank of China lowered the seven-day reverse repo rate, its benchmark policy rate, by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15. (See MNI PBOC WATCH: Rate Cuts Pushed Out, Structural Tools Eyed)

PBOC Governor Pan Gongsheng said in an article published in People’s Daily earlier this month that the central bank would ensure ample liquidity in the banking system while guarding against policy fatigue and long-term side effects from excessive measures to better support key areas and weak links. Pan added that the PBOC would enhance evaluations of monetary policy implementation and continue efforts to curb cutthroat competition and idle circulation of funds within the financial sector.

CAUTIOUS CUTS

Market participants interpreted the comments as signaling that any easing via broad-based cuts to policy rates or the RRR would be cautious, with liquidity injections carefully calibrated. (See MNI CHINA MONEY MARKET INDEX: Modest Rate Cuts Seen In 2026)

Xu Hongcai, deputy director of the China Association of Policy Science’s Economic Policy Commission, sees scope for a 50bp cut in the RRR and a 10-20bp reduction in interest rates. However, Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University, said any easing through traditional measures would likely remain cautious given its declining effectiveness in boosting credit demand as China’s economy shifts from scale expansion toward quality-driven growth.

Advisors said the PBOC is likely to prevent sharp volatility in market rates by maintaining ample liquidity, particularly at a time when demand is rising.

LIQUIDITY CONDITIONS

Attention has increased this month on whether liquidity conditions will tighten, as year-end liquidity fluctuations tend to intensify due to concentrated fiscal spending, rising corporate settlement demand and increased household cash withdrawals, which typically squeeze short-term liquidity.

The PBOC conducted a CNY100 billion 14-day reverse repo operation on Dec 18, its first since September, to prepare for additional funding demand. The central bank also injected a net CNY200 billion of medium-term liquidity earlier this month through two outright reverse repo operations.

Market participants expect the central bank to roll over CNY300 billion in medium-term lending facility loans set to mature next week and conduct treasury purchases to inject longer-term liquidity. These measures are expected to smooth liquidity fluctuations and help stabilise market expectations, advisors said.