China cut the one-year and five-year loan prime rates by 5bps on Wednesday, to 4.15% and 4.80%, respectively, in another nod to incremental easing from the PBoC as pressure on the economy refuses to abate.
The move was widely expected following this month’s 5bps cut to the medium-term lending rate, off which the LPR is priced.
The revamped rate – published each month on the 20th – was left unchanged in October, against expectations for a small reduction. It fell in September and also in August, the first month using the revamped calculation.
Recall that China on Monday cut the 7-day repo rate for the first time since 2015.
Late last week, the PBoC injected an extra 200 billion in liquidity on top of the 40 billion yuan freed up by the second of two targeted RRR cuts which went into effect on Friday.
Clearly, authorities are not concerned enough about surging consumer prices to hold off entirely on easing, although the PBoC did talk quite a bit about inflation in their third quarter monetary policy report released over the weekend.
Taken together, this month’s small adjustments have reduced rates across the curve, an indication that Beijing understands the need to provide accommodation, if only gradually. October’s credit data was weak across the board, as was activity data for the month.
It remains to be seen whether an interim trade deal with the US will come to fruition, but even if it does, it will likely be too little, too late to rescue the economy from an expected lackluster performance in Q4. Some see the pace of growth falling below 6%.
“Finally, the PBoC cut the [7-day repo rate]”, SocGen’s Wei Yao exclaimed on Monday. “The timing was a surprise to us (and the market), partly because the PBoC stayed put for nearly two weeks after it cut the 1-year MLF first, but the rationale of a parallel adjustment was always there”, she went on to say, adding that “1-year MLFs, though influential in setting the new benchmark lending rates (LPR), are just not as influential as 7-day reverse repos to the broader levels of interbank funding costs”.
SocGen expects to see this pattern continue. “After this episode, we should just expect the PBoC to keep adopting this combination in future easing: lowering the 7-day reverse repo rate and 1-year MLF in lock-step, accompanied by step-up in liquidity injections through RRR and/or targeted RRR cuts to push down market rates”, Wei remarked on Monday.
Because the MLF rate is effectively the benchmark for LPR, that will continue to pave the way for cuts to the loan prime rate each month, in an ongoing gradual easing campaign.
Also key to watch will be future moves in the five-year tenor. “Everyone is looking at whether the five-year rate will be adjusted as it shows the (official) attitude towards the property sector”, one trader at a Chinese bank in Beijing told Reuters this week.
It’ll be interesting to see if Donald Trump notices all these small cuts, or whether the labyrinthine nature of China’s rates regime throws him off the trail.