China Retains Benchmark Lending Rates As Expected

China left its benchmark lending rates unchanged, as widely expected, after easing last month, amid the economy struggling to recover from the impact of the coronavirus outbreak.

The one-year loan prime rate was retained at 3.85 percent and the five-year loan prime rate at 4.65 percent.

The one-year and five-year loan prime rates were last reduced in April. The one-year loan prime rate was lowered by 20 basis points and five-year rate by 10 basis points in April.

The loan prime rate is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This new lending rate replaced the central bank’s traditional benchmark lending rate in August 2019.

Last week, the People’s Bank of China had retained its rate on one-year Medium-Term Lending Facility, or MLF, at 2.95 percent despite market expecting a reduction. The MLF tool was introduced in 2014.

The benchmark lending rates were kept unchanged on Wednesday despite deleting the description of a prudent monetary policy stance, which created a market consensus that it is going to ease aggressively, Iris Pang, an ING economist noted.

The economist expects the PBoC could ease during the Two Sessions when the government work report is approved. This should include an interest rate cut and a reserve requirement cut of 0.5 to 1.0 percentage point.

The dovish tone of the PBoC’s latest monetary policy report and growing pressure on the central bank to do more, including calls for QE, suggest that this is a pause in, rather than an end to, the current easing cycle, Julian Evans-Pritchard, an economist at Capital Economics, said.

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