MNI PBOC WATCH: Q4 Easing Likely As Oct LPR Remains Steady

China’s Loan Prime Rate is likely to be lowered following a possible 10-basis-point policy rate cut later this year, as the economy faces stronger headwinds and further U.S. Federal Reserve easing reduces external constraints.

As expected, the LPR remained unchanged on Monday at 3.0% for the one-year tenor and 3.5% for the five-year. (See MNI PBOC WATCH: Oct LPR To Hold, Trump-Xi Meeting In Focus) Both fell in May by 10bp after the People’s Bank of China lowered the 7-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp cut to the reserve requirement ratio on May 15.

According to the National Bureau of Statistics, China’s GDP grew 4.8% quarter-on-quarter in Q3, the lowest since Q3 2024, though slightly above the expected 4.7%. Fixed-asset investment declined 0.5%, the weakest reading since July 2020, while retail sales recorded their fourth consecutive monthly fall.

SLOWER GROWTH

As the impact of the U.S.’s high-tariff policy on global trade and China’s exports becomes more evident in Q4, and investment and consumption growth slows, the need to step up policy support will increase. Meanwhile, the Fed’s September rate cut and the potential for further easing, will continue to weaken external constraints on China’s moderately loose monetary policy.

The PBOC is expected to trim the 7-day repo rate by 10bp by year-end to lower funding costs and ease deflationary pressure. A 50bp RRR cut – similar to May’s reduction – also remains an option as bullish equity markets continue to attract deposits away from banks, reducing lenders’ stable funding sources, Lian Ping, chairman of the China Chief Economist Forum, recently told MNI. (See MNI: PBOC To Make Slight Cuts In Q4, A-Share Rally Welcomed)

Officials from the NBS noted on Monday that macro policies have recently increased support, boosting consumption via trade-in programmes and driving investment in key projects. The country has ample policy reserves to respond to various risks and challenges, they stressed.

Since late September, authorities have advanced CNY500 billion in new policy-based financial instruments at an accelerated pace. The Ministry of Finance announced last week it would allocate a further CNY500 billion of the remaining local government debt quota to help resolve existing debt and expand investment, signalling strengthened policies aimed at stabilising growth.

A policy advisor told MNI there is room for policy rate reductions and a downward guidance for the LPR for the remainder of the year, given the need to boost demand and stabilise the real-estate market. Lowering lending rates for companies and households would serve as an important policy lever to promote consumption, expand investment, and offset the slowdown in external demand. Additionally, low price levels mean there is ample space for monetary policy to remain moderately accommodative, the advisor added.