The PBoC is expected to reduce rates further later in the year – UOB

UOB Group’s Economist Ho Woei Chen, CFA, assessed the latest interest rate decision by the PBoC.

Key Quotes

“The People’s Bank of China (PBoC) kept its benchmark interest rates unchanged in July for the third consecutive month, in line with consensus expectation. At today’s fixing, the 1Y Loan Prime Rate (LPR) and the 5Y & above LPR were set at 3.85% and 4.65% respectively. The interest rate on 1Y medium-term lending facility (MLF) loans to financial institutions which the LPR is pegged to, stands at 2.95% after 30 bps cut year-to-date.”

“This is the longest stretch since the LPR reform in August 2019 that the PBoC has kept the interest rate unchanged, which might suggest that the trajectory lower would be limited from here. Given the economic recovery in 2Q, there is good reason for the central bank to turn more cautious on broad-based easing.”

“Taking into consideration of the domestic growth recovery, risk of more prolonged global recovery from COVID-19 pandemic and US-China tensions, we have adjusted higher our forecast for the 1Y LPR to 3.75% at end-3Q20 and end-4Q20, up from previous outlook of 3.60% end-3Q20 and 3.55% at end-4Q20. This assumes the PBoC will cut the 1Y LPR by another 10 bps for the rest of the year after the 30 bps cut in 1H20. Furthermore, there is also scope for another one to two rounds of reductions to the Reserve Requirement Ratio (RRR) for the remainder of 2020.”