China's Loan Prime Rate is likely to remain unchanged on Wednesday as pressure on the yuan rises and lenders’ interest margins narrow, restricting the central bank’s capacity to cut rates.
The one-year LPR will likely stay at 3.1%, while the over five-year rate will hold at 3.6%. Both tenors fell 25 basis points last month, the largest reduction since authorities reformed the LPR pricing system in 2019.
The People’s Bank of China stressed in its Q3 monetary policy report this month that net interest margins and exchange-rate pressures would inhibit further rate cuts. Bank loan rates had fallen too quickly, while deposit rates remained rigid, exacerbating the excessively low net interest margin issue and limiting monetary policy, the PBOC noted. (See
MNI: Beijing's Bank Capitalisations To Lift Tier-1, Lending )
NO RUSH TO CUT
The report detailed the PBOC’s focus on improving the transmission of its policy rate, in part by reducing deposit- and loan-rate competition through a self-regulatory pricing mechanism, which could have a similar impact on the economy as a rate cut.
In addition, National Bureau of Statistics data last week painted a more positive picture of economic performance in October, particularly among consumption and real estate, easing the urgency of further rate cuts this year.
PBOC Deputy Governor Zhu Hexin said at a forum in Hong Kong on Tuesday the effects of recent policy easing were starting to reduce financing costs for firms and residents, which would support consumption. The reduction of existing mortgage rates had also led to an increase in property trading volumes, he added.
YUAN CONCERNS
The PBOC in its Q3 report also said it would “strengthen expectation management” in the foreign exchange market while maintaining the yuan’s flexibility. The central bank reintroduced the counter-cyclical factor in daily yuan fixing this month to curb any rapid weakening of the currency, following the U.S. dollar’s sharp rally driven by the resumption of so-called “Trump trades.” (See
MNI: PBOC Restarts Counter-Cyclical Factor In Yuan Fix-Traders )
The central bank will act to counter any herd effect that could lead to the yuan overshooting beyond fundamentals, while maintaining flexibility if it needs to depreciate the currency as a countermeasure against U.S. tariffs next year.
