Market Predictions Suggest Unchanged Loan Prime Rate (LPR)
According to a recent Reuters survey, China is anticipated to keep its lending benchmark rates unchanged during the monthly fixing on Wednesday. This comes after the People’s Bank of China (PBOC) decided to leave its medium-term policy rate unchanged last week. The loan prime rate (LPR), which is the rate typically charged to banks’ top-tier clients, is determined each month based on proposed rates submitted by 18 designated commercial banks to the PBOC. All 28 market analysts who participated in the survey predicted that both the one-year LPR and the five-year tenor would remain unchanged.
LPR’s Significance and Recent Liquidity Injections
The majority of new and outstanding loans in the world’s second-largest economy are tied to the one-year LPR, which currently stands at 3.45%. It has been reduced by 10 basis points since the beginning of the year. The consistent consensus on steady LPR fixings follows the PBOC’s substantial liquidity injections through medium-term policy loans last week, while maintaining the interest rate. The central bank injected a net 800 billion yuan ($112.02 billion) into the banking system via medium-term lending facility (MLF) loans, marking the largest monthly increase on record. Analysts generally interpret the MLF rate as an indicator for the LPR, making the medium-term policy rate influential in predicting any changes to the lending benchmarks.
Observations and Future Rate Cut Speculations
Julian Evans-Pritchard, Head of China Economics at Capital Economics, suggests that policymakers may desire more time to evaluate the effects of recent fiscal support and property easing measures before adjusting the benchmark rate. However, given the weak economic momentum and the renminbi’s return to levels favoring the PBOC, Evans-Pritchard forecasts that the PBOC will resume rate cuts in the near future. He predicts a reduction of 20 basis points by the end of the second quarter next year. The Chinese yuan has experienced significant volatility this year, initially weakening 6.14% against the dollar before partially recovering amid expectations of the peak in U.S. interest rates. Although the onshore spot yuan demonstrated a 2.55% strengthening in November, it is still down by 3.4% year-to-date.