People's Bank of China Holds LPR Steady on 22nd as Market Expected
As the People's Bank of China effectively froze the Loan Prime Rate (LPR), which serves as the benchmark interest rate, there are forecasts that there is no room for further cuts in the short term.
On the 22nd, Won Bin, chief economist at Minsheng Bank, told the Chinese economic media outlet Caijing that "loan interest rates have sharply declined this year, and banks' net interest margins continue to be pressured," adding, "there is no room for additional LPR cuts in the short term."
Wang Qing, chief macro analyst at the Chinese credit rating agency Dongfang Jincheng, said, "Banks' net interest margins have fallen to low levels in the first quarter, indicating a lack of motivation for rate cuts," and "the macroeconomy continues to rebound, showing upward momentum."
He further explained that considering current inflation and economic trends, the Medium-term Lending Facility (MLF) rate could be cut in the third quarter, with LPR adjustments likely to follow thereafter. He added, "Subsequently, the interest burden on corporations and homebuyers will continue to decrease, which will also be favorable for resolving local government bond risks."
Earlier, the People's Bank of China announced that it would keep the LPR unchanged at 3.45% for the one-year term and 3.95% for the five-year term. The LPR is calculated by aggregating the loan rates offered to the best customers by 18 designated banks. Since local financial institutions base their lending on this rate, it effectively serves as the benchmark interest rate in China. The one-year rate affects general loans, while the five-year rate influences mortgage loans.
The People's Bank of China lowered the five-year LPR from 4.20% by 0.25 percentage points in February and then kept both the one-year and five-year rates unchanged in March. The one-year rate has remained steady for eight months since it was lowered from 3.55% to 3.45% in August last year.
On the 15th, the People's Bank of China also signaled the LPR freeze by keeping the MLF rate, which provides short-term funds to commercial banks for one year, steady at 2.50%. At that time, experts assessed that "the current market liquidity is sufficient," and "a reduction in MLF lending could help maintain the balance of supply and demand in the banking system's cash flow."
The Chinese monetary authorities appear to have made this judgment considering the recent strengthening economic recovery, falling inflation, and a weakening yuan. On the 18th, Zhou Ran, director of the Monetary Policy Department at the People's Bank of China, stated, "A comprehensive review and judgment of inflation and real interest rates are necessary in monetary policy," adding, "It is important to prevent a vicious cycle where excessively low interest rates intensify competition and capital outflows, leading to further declines in inflation." Zhou explained, "Nominal interest rates have continuously declined over the past two years, playing a positive role in promoting overall economic recovery, but (when rates fall) domestic demand weakens and inflation declines simultaneously."
Above all, China's gross domestic product (GDP) growth rate in the first quarter recorded 5.3%, exceeding domestic and international forecasts of the high 4% range, which is interpreted as boosting confidence in the economic recovery. This reflects expectations that monetary intervention is not urgent and that the current recovery trend in domestic demand and exports can continue.
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