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The People’s Bank of China (PBOC), the country’s central bank, is seen in Beijing, China, on September 28, 2018. Jason Lee/Jason Lee/Jason Lee/Jason Lee/Jason Lee/ (Reuters) – SHANGHAI, July 14 – Following China’s unexpected decision to slash reserve requirements for its banks last week, some market analysts believe a fall in the country’s benchmark loan prime rate is on the way, maybe as soon as next week. On Friday, the People’s Bank of China (PBOC) announced a reduction in the amount of cash that banks are required to retain as reserves, releasing about 1 trillion yuan ($154.43 billion), which was more than expected. It goes into effect on July 15th. While most market participants believe the RRR decrease was intended to stabilize banks’ funding needs and minimize their costs in order to foster credit growth, some feel a cut in main policy rates would complement this new dovish stance. According to the latest Reuters poll published on Tuesday, the PBOC is projected to slash the RRR by another 50 basis points in the fourth quarter as the economy remains under pressure while consumer inflation eases. find out more Analysts and economists weigh in on the outlook for the loan prime rate (LPR) and the medium-term lending facility rate (MLF). On Thursday, the PBOC is anticipated to publish a statement on maturing MLF loans, while the next LPR will be set on July 20: JIANGHAI SECURITIES, BEIJING, QU QING, CHIEF ECONOMIST “Lowering the RRR is one of the government’s regulatory measures aimed at lowering the cost of corporate financing. The market is now waiting to see if the LPR will be decreased as well.” “If the LPR is cut this month, the chances of a subsequent cut in the medium-term lending facility (MLF) rate are reduced.” If the LPR remains unchanged after the RRR cut this month, the MLF rate will most likely be reduced in the future to steer LPR reduction.” “Overall, given the call for lower financing costs hasn’t changed and has gotten even more pressing, the possibility of adopting other methods in the future cannot be ruled out.” BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BEIJING, BE “The impact of lowering banks’ financing costs by lowering the RRR and benchmark deposit rate is likely to force the LPR fixing lower.” “Even if the MLF interest rate remains unchanged, the growth can be effectively decreased, forming a rather substantial push for the LPR downward trend.” LU TING, NOMURA, HONG KONG, CHIEF ECONOMIST “Following the RRR cut, we believe the likelihood of another cut before the end of the year is low, maybe less than 50%, and if there is another cut, it will more likely be targeted rather than universal.” And, if necessary, we anticipate the PBOC will rely more on its lending facilities, including as the MLF, as well as relending and rediscounting to provide long-term liquidity.” If the PBOC cuts the MLF or LPR rates later this month, it might pave the way for another rate hike. However, given our base case of no change in policy rate levels, we do not believe there is a strong possibility of a big rate rally from current levels, and we prefer to receive on bounces.” RATES STRATEGIST, DBS GROUP RESEARCH, SINGAPORE EUGENE LEOW “On the PBOC-Fed policy divergence, there are a few things to keep in mind. First, the Fed is expected to begin tapering by the end of 2021 or the beginning of 2022, whereas the PBoC has already softened.” Second, the United States appears to have a higher tolerance for COVID-19 and is more fiscally aggressive. At this point in the cycle, these could be more beneficial to the US economy. China, on the other hand, has been more careful in its handling of COVID-19 and fiscally conservative. “Given this change, we now envision the 1-year LPR maintaining constant through 2022.” EVERBRIGHT SECURITIES, BEIJING, WANG YIFENG, CHIEF ANALYST “The LPR and MLF are intertwined, with the MLF rate serving as a standard for the LPR. A reduction in the RRR does not always imply a reduction in the LPR.” “The RRR drop should save banks roughly 13 billion yuan in interest payments, which translates to a comprehensive debt cost of less than 1 basis point… it is not enough to generate a downward adjustment to LPR quote at this stage.” BEIJING’S ZHANG JIQIANG, CHIEF ANALYST, HUATAI SECURITIES “We don’t think there’s a good likelihood of an MLF or OMO rate drop this month, but we think there’s a good chance of an LPR cut.” “According to a survey we did, the majority of investors thought (China’s) 10-year government bond yields may drop to 2.8 percent -2.9 percent… And we’re very much in agreement. “The 10-year yield has dropped to little around 3%. MARCO SUN, MUFG BANK, SHANGHAI, CHIEF FINANCIAL MARKETS ANALYST “The RRR drop by the PBOC was originally intended to buffer market liquidity and enterprise shocks… We maintain our expectation that China’s LPR will not be modified this year since the central bank may continue to maintain a balanced market liquidity.” GAVEKAL RESEARCH, BEIJING, CHINA ECONOMIST HE WEI “The State Council’s remark suggests officials may be more dovish than previously thought.” Given the PBOC’s surprise, it’s now possible that policy rates may be slashed by 5 basis points in the second half of the year.” (1 US dollar = 6.4755 Chinese yuan) Winni Zhou and Andrew Galbraith contributed reporting.
Vidya Ranganathan and Kim Coghill edited the piece.
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