China leaves benchmark lending rates unchanged as expected

SHANGHAI/SINGAPORE   -China kept its benchmark lending rates unchanged at the monthly fixing on Friday, matching market expectations, as a set of economic data suggested the economy is stabilizing and a weaker yuan constrained further monetary easing.

The one-year loan prime rate (LPR) was kept at 3.45 percent, while the five-year LPR was unchanged at 4.2 percent.

Better-than-expected third quarter gross domestic product (GDP) and retail sales data suggest China’s economic recovery has started to improve, needing less monetary support.

“Economic activity has stabilized and authorities can afford to wait a while before deploying more monetary easing down the road,” emerging market analysts at TD Securities said in a research note.

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Bearish sentiment over the yuan was also seen as a factor against further rate cuts. The yuan has depreciated by more than 5 percent this year against the dollar and increasing liquidity would add additional pressure on the currency.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

In a Reuters survey of 29 market analysts and traders, almost all participants predicted no change to the one-year LPR, while all had expected the five-year rate to remain steady.

Medium-term lending facility

The steady LPR fixings follow the central bank’s decision on Monday to roll over maturing medium-term policy loans while keeping the interest rate on them unchanged.

The medium-term lending facility (MLF) rate serves as a guide to the LPR and markets see it as a precursor to any changes to the lending benchmarks.

While the rates were left unchanged, the PBOC injected the biggest cash support since late 2020 on Monday to allow banks to extend credit at a time when funding conditions were tight due to heavy bond supplies and tax payments collected by the government.

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For the next few months, market participants are not ruling out the possibility of a rate cut.

Economists at Barclays expect fresh 10-basis-point cuts to policy rates in the fourth quarter and the first quarter next year, as deflation risks linger and domestic demand conditions remain weak.

China cut the one-year benchmark lending rate in August but surprised markets by keeping the five-year rate unchanged.

So far this year, 1-year and 5-year LPRs have been lowered by 20 bps and 10 bps, respectively.

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