MNI PBOC WATCH: PBOC Seen Easing, Guiding LPR Lower, In Q2

The People’s Bank of China is likely to guide the benchmark Loan Prime Rate lower in the second quarter, as the economy faces the impact of U.S. tariffs and as lower deposit rates provide more room for lenders to ease their borrowing rates.

The LPR, calculated with quotes from 18 banks, remained unchanged on Monday at 3.1% for the one-year maturity and 3.6% for five years and over, in line with expectations after the PBOC left its 7-day reverse repo rate unchanged. The rates for both tenors were last reduced in October, by 25 basis points -- the largest cuts since the reform of the LPR pricing system in 2019 -- following the PBOC’s 20bp reduction on its 7-day reverse repo rate in September. (See MNI PBOC WATCH: April LPR To Hold As Tariff Impact Contained)

The PBOC has kept its easy policy settings unchanged this year, with a stronger-than-expected economic performance in Q1 reducing the urgency of a lower LPR. But, as additional U.S tariffs take effect in Q2, the central bank is expected to respond by boosting domestic demand with cuts to interest rates or reserve requirement ratios.

The PBOC has ample room for monetary easing, particularly in terms of reserve requirement cuts, but prefers to preserve policy space for potentially extreme scenarios, Bank of China Research Chief Zong Liang told MNI recently. (See MNI INTERVIEW: PBOC To Ease In Tariff Response - BOC's Zong)

But Q2 will be critical, Zong said, and monetary easing will need to be coordinated with fiscal measures to boost demand for credit, with authorities increasing incentives for consumption as well as investment in public welfare projects. Ministry of Finance Issuance of special treasury bonds will require the PBOC to inject liquidity, he said.

Broad dollar weakness also provides more room for easing by the PBOC, which policy advisors say is likely to permit only a gradual depreciation of the yuan as it guards against the risk of capital outflows and as it is wary of being seen to devalue its currency against those of other Asian nations with which Beijing hopes to cooperate in response to U.S. trade policy. (See MNI: PBOC Seen Gradually Weakening Yuan Fixing Amid Trade War)

With net interest margins at historic lows, banks have also started to reduce their deposit rates, which should permit them to lower their LPR quotes.