China seen keeping benchmark lending rates unchanged for 4th month

3:24 am Monday, December 19th, 2022

SHANGHAI (Reuters) – China is likely to keep benchmark lending rates unchanged for the fourth straight month in December on Tuesday, a Reuters survey showed, but expectations for monetary easing are rising.

Political leaders vowed at an agenda-setting meeting last week to step up support for the economy battling a wave of infections after rigid COVID-19 preventive controls were abandoned, fuelling speculation Beijing would loosen policy.

The loan prime rate (LPR), which banks normally charge their best clients, is calculated each month after 18 designated commercial banks submit proposed rates to the People’s Bank of China (PBOC).

In a poll of 27 market watchers, 17 or 63% of all participants predicted no change to either one-year LPR or the five-year tenor.

Among the remaining 10 respondents who expect some monetary easing this month, eight forecast a cut to the five-year tenor while seeing no change to the one-year LPR. The other two projected reductions to both tenors.

Most new and outstanding loans in China are based on the one-year LPR, which stands at 3.65%. The five-year rate influences the pricing of mortgages and is now at 4.30%. China last cut both LPRs in August to boost the economy.

“December’s reserve requirement ratio (RRR) cut could have created room for near-term LPR cut, especially at the 5-year tenor,” Citi analysts said in a note.

“We think the efforts to support the economy (especially the home market) should be delivered sooner rather than later,” they added, expecting a 10-basis-point reduction to the mortgage reference rate.

Vice premier Liu He said last week that China was considering new measures to support its debt-laden real estate sector in order to improve the industry’s balance sheet.

One-year interest rate swaps, a gauge that measures investor expectations of funding costs in the future, fell as much as 5 basis points before last trading at 2.15% on Monday afternoon, as senior leaders vowed to focus on stabilising the $17-trillion economy in 2023.

The central bank ramped up cash injections into the banking system last week, while keeping an interest rate on the medium-term policy loans unchanged for the fourth straight month.

The borrowing cost of the medium-term lending facility (MLF) serves as a guide to the LPR, and markets usually use the medium-term policy rate as a precursor to any changes to the lending benchmarks.

“For now, we suspect policymakers will remain on hold to see how the reopening develops,” said Win Thin, global head of currency strategy at Brown Brothers Harriman

“If weakness continues in the new year, expect more stimulus to come in Q1.”

(Reporting by Steven Bian and Brenda Goh, Writing by Winni Zhou; Editing by Jacqueline Wong)