As expected, China’s benchmark interest rate for household and corporate lending remained unchanged. However, analysts believe that the case for monetary stimulation is growing amid increasing external risks to an already slowing economy.
The LPR for a one-year loan was 3.70%, while it was 4.60% for a five-year loan.
In a snap Reuters poll, just over half of the analysts and traders surveyed expected China to maintain both rates unchanged.
LPR pricing is tied loosely to the People’s Bank of China’s medium-term lending facility rate (MLF), which was kept unchanged by the central bank last week. This shattered expectations of a reduction. 18 banks set the LPR monthly by submitting quotations of their lending rates.
The market expects policymakers to soon resume monetary easing to revitalize an economy that has been hit by a domestic COVID-19 revival, weaker credit growth, and a faltering real estate sector. There are also increasing risks from the conflict in Ukraine.
Win Thin, the global head of currency strategies at Brown Brothers Harriman said that more stimulus is needed to achieve the country’s 5.5% growth target for this year.
He stated that “We see another round rate cuts coming in early quarter 2,” in a note earlier today.
Liu He, the Chinese Vice Premier responsible for economic policy, urged last week the adoption of market-friendly policies in support of the slowing economy.
Liu’s comments reinforced market expectations of monetary easing in the coming months. Many expect the PBOC will reduce the reserve requirement ratio (RRR), for banks, and other policy rates.
Citi analysts stated in a note that there is no precedent for lowering LPR without a reduction in RRR or policy rate.
Analysts argue that lowering interest rates could lead to capital outflows if other major economies like the United States tighten their monetary policies.
An increase in policy divergence among the two largest economies of the world could reduce China’s yield advantage over the United States and cause investors to move their money elsewhere.
The yield gap between China’s benchmark 10-year government bonds (China’s benchmark) and the U.S. Treasury has narrowed to 65 basis points. This is its narrowest point in three years.
The one-year LPR is the basis of the most outstanding and new loans in China. The pricing of mortgages is affected by the five-year rate.