China keeps lending rates stable; the market sees the reserve rate cut as the next move

SHANGHAI/SINGAPORE, May 22 (Reuters) – China kept its benchmark interest rates unchanged for the ninth month of May on Monday, in line with market expectations, as a weakening yuan and widening interest rate differentials with the United States limited the scope for some significant monetary policy easing.

A raft of data over the past month or so, including April indicators last week, pointed to an economy losing steam after the initial post-COVID upturn and raised hopes of more easing.

But given the risk of capital outflows that could further damage a sliding yuan, some analysts now expect the People’s Bank of China (PBOC) to reduce the amount of cash banks need to set aside as its next policy move.

Earlier in the day, China’s one-year prime rate (LPR) was held at 3.65% and its five-year LPR was unchanged at 4.30%.

In a Reuters poll of 26 market watchers conducted last week, 23 predicted no change in prices for this month.

“Despite the weakness in April, we do not expect policymakers to unleash major stimulus as the 5% GDP growth target remains well within reach and issues such as property risk and youth unemployment require a more targeted approach,” economists at Goldman Sachs said in a press release . Note.

“Within monetary policy, token measures such as a cut in the reserve requirement ratio (RRR) are more likely than policy rate cuts this year given the already large interest rate differential between the US and China and the RMB depreciation pressure.”

China’s yuan weakened past the psychologically important 7 per dollar last week to hit a five-month low. It has fallen almost 5% from its peaks in late January.

At the same time, the yield gap between China’s benchmark 10-year government bonds and their US counterparts is at its widest level in two months.

The steady LPR fixings also came after the PBOC rolled over maturing medium-term lending facilities (MLF) while keeping interest rates unchanged last week.

The MLF rate acts as a guide to the LPR, and the markets mostly use the medium-term rate as a precursor to any changes in the lending benchmarks.

Economists at Capital Economics said last week that the central bank’s aim was to ensure that credit growth, which fell in April, would not slow too much as “the reopening increase in credit demand slows”.

“This can probably be achieved without a policy rate cut, which we believe the PBOC will try to avoid,” they said.

“The downside of lowering the LPR is that it reduces the banks’ return on their existing loan book, and puts pressure on net interest margins, which are at record lows.”

They said the PBOC could use other tools such as RRR cuts, deposit rate window guidance and liquidity injections to steer funding costs lower.

LPR, which the banks normally charge their best customers, is set by 18 designated commercial banks who send proposed rates to the central bank every month.

Most new and outstanding loans in China are based on one-year LPR, while the five-year interest rate affects mortgage pricing. China last cut both LPRs in August 2022 to boost its economy.

Reporting by Winni Zhou and Tom Westbrook; Editing by Tom Hogue

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