China keeps key lending rates unchanged as expected, according to Reuters

© Reuters. Paramilitary police officers stand guard outside the headquarters of the People’s Bank of China, the central bank, in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo

SHANGHAI/SINGAPORE (Reuters) – China on Wednesday tapped benchmark interest rates at a one-month peg, in line with market expectations after the central bank kept its medium-term policy rate steady early last week.

But market watchers continued to expect Beijing to ease monetary policy further in the new year to support a sharp economic recovery as deflationary pressure pushes up real borrowing costs.

The one-year prime rate (LPR) was left at 3.45%, while the five-year LPR remained unchanged at 4.20%.

Most new and outstanding loans in the world’s second-largest economy are based on a one-year LPR of 3.45%. In 2023, it was cut twice by a total of 20 basis points.

The five-year rate affects the price of mortgages and is now 4.20%. So far this year, it has been reduced by 10 basis points.

In a Reuters poll of 28 market watchers conducted this week, all participants forecast no change in either the one-year or five-year LPR.

The steady fixes came after the central bank left its medium-term monetary rate unchanged and the one-year LPR is loosely linked to the medium-term lending facility (MLF) rate.

Market participants typically see changes in the MLF as a precursor to changes in the LPR.

The People’s Bank of China (PBOC) last week increased liquidity injections through medium-term loans, while keeping the interest rate unchanged.

The central bank pumped a net 800 billion yuan ($112.22 billion) of fresh funds into the banking system through medium-term loans (MLF), marking the largest monthly increase on record.

“Although the PBOC avoided cutting the reserve requirement ratio (RRR) in December and injected net liquidity to a record level, we still expect a 20 basis point rate cut and a 50 basis point cut in the RRR next year,” said Serena Zhou, China’s chief economist at Mizuho Securities.

“Furthermore, we expect the PBOC to favor lower deposit interest rates rather than key lending rates, given the tight interest margins for most Chinese banks.”

Separately, some analysts said policymakers may need some time to assess the effects of recent fiscal support and renewed efforts to revive a stagnant housing market.

“The latest squeeze on spreads, which allows commercial banks to charge less for new home loans in Shanghai and Beijing, has yet to be fully felt and warrants watching before a more aggressive cut in the benchmark,” said Bob Savage, director. market strategies and insights on BNY Mellon (NYSE: ) Capital Markets.

The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks that submit proposed rates to the central bank every month.

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