SHANGHAI (Reuters) – China is expected to keep lending standards unchanged this week, with authorities seeing a short-term postponement of monetary easing to avoid further devaluation pressure, a survey of market participants showed.
The loan principal rate (LPR), which banks typically charge their best customers, is set by 18 designated commercial banks that submit the proposed rates to the People’s Bank of China (PBOC).
Twenty-one out of 28 respondents, or 75% of all respondents, in the snap Reuters poll, expected no change in the one-year or five-year LPR at installation on Tuesday.
Of the remaining seven respondents, six expected a five basis point cut in the five-year LPR to stimulate the real estate sector, while the other respondent expected marginal cuts for both rates.
Most of the new and outstanding loans in China are based on the one-year LPR, which now stands at 3.65%. The five-year rate affects mortgage rates and is now 4.30%.
Both rates were lowered in August to revive demand for credit and support the faltering economy.
Expectations for the LPR to hold steady comes as the divergence between China’s monetary policies and most other major economies weighs on the yuan, limiting the scope for further policy easing.
China, along with Japan, has been a major remote country amid a global series of interest rate hikes to tame inflation, as Beijing has focused on reviving an economy battered by the COVID-19 shocks.
The People’s Bank of China (PBOC) renewed a portion of its medium-term policy loans maturing last week, while keeping the interest rate unchanged.
The borrowing cost of a medium-term lending facility (MLF) serves as a guide to the LPR, and markets usually use the medium-term policy rate as a precursor to any changes in lending criteria.
“Although it is not an infallible signal — the LPR was lowered without the MLF cut last December — it does make a LPR cut unlikely,” economists at Capital Economics said in a note.
“We expect further rate cuts at some point given the bleak economic outlook. But that depends on pressure on renminbi easing. The People’s Bank of China (PBOC) will not unleash a rate cut until that happens.”
The yuan has lost about 4 percent against the dollar since mid-August and is on track for its biggest annual loss since 1994, when China unified its official and market exchange rates. [CNY/]
Separately, five of China’s largest banks announced cuts to interest rates on personal deposits last week, a move that may ease pressure on margins after recent lending rate cuts to revive the economy.
“The cut may allow a little more room for the LPR to cut,” said Ting Lu, chief China economist at Nomura.
“However, there appears to be limited room for further reductions in LPR rates, and these moderate adjustments to standard rates are likely to have a limited economic impact.”