Beijing keeps lending rates unchanged

Guards are seen outside the PBoC building in Beijing. — Bloomberg

SHANGHAI: China is keeping its benchmark lending rates unchanged for a sixth straight month in February, as expected, with the world’s second-largest economy showing more signs of recovery from a pandemic-induced slump.

Better-than-expected data recently suggested economic activity is rebounding as Beijing exited its stringent zero-Covid strategy in December and shifted to a pro-growth policy stance.

The one-year loan prime rate (LPR) was kept at 3.65%, while the five-year LPR was unchanged at 4.3%.

“We expect the People’s Bank of China (PBoC) to stay accommodative in the first half of this year, but only through liquidity-related actions and not rate cuts,” analysts at Barclays said in a note.

“In contrast to the United States and the European Union, China remains the monetary policy outlier, with still benign inflation and recovering but still weak activity, allowing the PBoC to remain accommodative in the first half.”

In a poll of 27 market watchers, 21 (or 78% of all participants) predicted no change to either rate.

New bank loans in China increased more than expected in January to a record 4.9 trillion yuan (RM3.16 trillion) as the central bank sought to kick-start recovery, while new home prices rose for the first time in a year as Beijing increased support for the property sector, which accounts for a quarter of the domestic economy.

Market participants also said the LPR decision was within expectations, as the PBoC ramped up medium-term liquidity injections and rolled over maturing policy loans last week while keeping the interest rate unchanged.

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

In spite of recovering momentum, some analysts expect rates will ease after China’s annual parliamentary gathering in March, when the government announces key growth targets for the year.

“We think that the PBoC might cut the MLF rate and that the banks will subsequently reduce the loan prime rates as early as March following the annual session of the National People’s Congress, which is scheduled to begin on March 5,” said Tommy Wu, senior economist at Commerzbank.

“Macroeconomic stimulus will almost certainly be announced during the annual session. It will be an ideal time for the PBoC to cut rates and signal that it is ready to support the economic recovery.”

Tommy Xie, head of Greater China research at OCBC Bank, agreed that rates would likely be cut in the coming months.

“In the face of weak domestic demand, loosening monetary policy is likely to go hand in hand with expansionary fiscal policy.

“A lower interest rate will help minimise the cost of the issuance of government bonds,” Xie said, adding that a lower mortgage rate could also help diffuse systemic risk.

The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks, which submit proposed rates to the central bank every month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China last cut both rates in August to boost the economy. — Reuters