PBOC cut three policy rates to boost slowing economy, benchmark lending rate LPR expected to be cut next week

 

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The People’s Bank of China (PBOC) cut three policy rates on Tuesday after China’s credit growth for July came sharply lower than expected and other key economic data showed further weakness.

The PBOC injected 401 billion yuan liquidity via one-year Medium-Term Lending Facility (MLF), at an interest rate of 2.5%, falling by 15 basis points from a rate of 2.65% in the previous MLF operation, while 400 billion yuan MLF loans expired on the day.

Notably, the 15-basis-point reduction marks the biggest cut to the rate since the 20-basis-points cut in April 2020.

The PBOC also injected 204 billion yuan liquidity to the banking system via 7-day reverse repurchase agreement (reverse repo), at a rate of 1.8%, a cut of 10 basis points from a rate of 1.9% in the previous operation. Six billion yuan reverse repo expired on the day.

On the same day, the central bank reduced the interest rate on the overnight, 7-day and one-month Standing Lending Facility (SLF) by 10 basis point to 2.65%, 2.8% and 3.15%, respectively, effective from August 15.

The latest rate cuts came after the PBOC lowered policy rates two months earlier. On June 13, the central bank cut the interest rate on 7-day reverse repo by 10 basis points to 1.9% and reduced SLF rates by 10 basis points, and then two days later, it cut the rate on one-year MLF by 10 basis points to 2.65%.

The MLF rate cut is expected to drag down China’s benchmark lending rate Loan Prime Rate (LPR), with one-year LPR likely to be cut by 10 basis points and 5-year LPR by 15 basis points, said Wen Bin, chief economist at Minsheng Bank.

Ming Ming, chief economist at CITIC Securities, said that there is room for another 10 – 30 basis point cut to China’s policy rates before the end of the year and in addition, the PBOC will likely cut banks’ reserve requirement ratio (RRR) in the third quarter of the year.

The rate cut came faster than expected and laid the groundwork for a cut in the benchmark lending rate LPR by 15-20 basis points next Monday, Morgan Stanley said in a note. 

The authorities are expected to step up counter-cyclical easing to stabilize demand and reduce the risk of the economy falling into a debt or deflationary cycle, considering the subdued economic data for July and renewed liquidity issues at some property developers, it said. 

China’s economic data for July was broadly weaker than expected, amid sluggish data for trade, inflation and credit, reflecting weaker growth momentum despite continued policy easing, said Goldman Sachs in a note.

The benchmark lending rate LPR is expected to be lowered by 15 basis points next Monday, August 21, but this should be far from enough to boost economic growth, the bank said.