2023-12-20 13:06:03
China kept its benchmark lending rates unchanged at the monthly setting on Wednesday, in line with market expectations, after the central bank kept its medium-term policy rate steady early last week.
But market watchers still expected Beijing to pursue further monetary easing in the new year to support an economic recovery that is faltering as deflationary pressure pushes up real borrowing costs.
The prime rate on one-year loans remained at 3.45%, while the prime rate on five-year loans remained unchanged at 4.20%.
Most new and outstanding loans in the world’s second largest economy are based on the one-year LPR, which stands at 3.45%. It was lowered twice by a total of 20 basis points in 2023.
The five-year rate influences the price of mortgages and is now 4.20%. It fell 10 basis points so far this year.
In a Reuters poll of 28 market watchers this week, all participants predicted no change in either the one-year rate or the five-year rate.
The stable fixes came after the central bank left its medium-term policy rate unchanged, with the one-year LPR loosely pegged to the medium-term lending facility (MLF) rate.
Market participants often view changes in the MLF as precursors to changes in the LPR.
The People’s Bank of China (PBOC) last week increased liquidity injections through medium-term policy loans, while leaving the interest rate unchanged.
The central bank injected a net 800 billion yuan ($112.22 billion) of fresh funds into the banking system through medium-term lending facility (MLF) loans, recording the largest monthly increase ever recorded.
“Although the PBOC avoided a reserve requirement ratio (RRR) cut in December and injected net liquidity at a record level… we still expect 20 basis points of rate cuts and 50 basis points of RRR cuts next year” said Serena Zhou, senior China economist at Mizuho Securities.
“Furthermore, we expect the PBOC to prioritize targeting lower deposit rates over prime lending rates, given the tight interest margins of most Chinese banks.”
Separately, some analysts said policymakers may need some time to assess the effects of recent fiscal aid and renewed efforts to revive the sluggish real estate market.
“The latest push to narrow spreads, allowing commercial banks to charge less for new housing loans in the major cities of Shanghai and Beijing, has not yet been fully felt and warrants a watch before to apply more aggressive cuts in the reference rate,” said Bob Savage, head of markets and outlook strategy at BNY Mellon Capital Markets.
The TPL, which banks typically charge their best customers, is set by 18 designated commercial banks that submit their rate proposals to the central bank each month.
($1 = 7.1287 Chinese yuan)
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