PBC likely to cut LPR rates next week following targeted RRR cut
Published: Mar 14, 2020 02:59 PM

The building of the People’s Bank of China in Beijing Photo: VCG

The People’s Bank of China (PBC), the country’s central bank, is likely to further lower the loan prime rate (LPR), the market-oriented benchmark lending rate, next week to ease financial strain for businesses in the aftermath of a relentless coronavirus assault, market experts said.

Under a restructured scheme of the central bank, the LPR will be adjusted on the 20th of each month based on rates of the PBC’s open market operations.

A potential downward adjustment to the LPR is likely, but it won’t be larger than the previous cut, Zhang Anyuan, chief economist with China Securities, told the Global Times on Saturday, noting that the Fed’s FOMC meeting next week may have some impact.

On February 20, China’s one-year LPR was cut by 10 basis points to 4.05 percent, while the five-year and above LPR was lowered by 5 basis points.

According to Zhang, the central bank is inclined to lower lending rates through the LPR instead of cutting benchmark rates in an effort to liberalize its interest rates. As for the deposit interest rates, the RRR cuts have already helped reduce funding costs for commercial banks, so there is no need to roll out an overall rate cut.

Echoing Zhang’s remarks, Gao Liankui, adjunct professor at the Business School of the Netherlands, agreed claiming a benchmark interest rate cut is unnecessary.

“Benchmark interest rates are not at high levels in China, so there is limited room for downward adjustment,” Gao told the Global Times on Saturday.

“Of course, if the global central banks all adopt negative interest rates and quantitative easing, then the PBC will have to take response measures,” Zhang remarked. “After all, China cannot afford to maintain an elevated positive rate spread in comparison with rest of the world.”

The central bank has recently embarked on intensive monetary easing measures to support bank lending to small and medium-sized enterprises in an effort to accelerate business resumption and lower financing costs. 

The PBC announced on Friday that it will implement targeted reserve requirement ratio (RRR) cuts for eligible lenders from Monday, a move that will release 550 billion yuan ($78.57 billion) long-term funds to the lenders. The central bank has also provided 800 billion yuan to commercial banks via its relending and rediscounting window after the coronavirus outbreak.

According to a research note Nomura sent to the Global Times, the PBC’s policy easing will probably help new yuan loans and aggregate financial rebounds in March after the sluggish credit figures in February.

Latest statistics from the central bank showed that new yuan loans dropped to 905.7 billion yuan in February when the virus was on its monsoon onslaught, from January’s 3.34 trillion yuan.

However, Gao pointed out that while the central bank rolls out measures to support the real economy, authorities should work out specific policies to promote capital investment and domestic consumption, and make full use of the ample liquidity in the market.