SHANGHAI (Reuters) – China will likely keep its policy rate unchanged when it was set in July on Tuesday, a small majority of people polled in a Reuters survey said, but expectations of a cut are mounting after a surprise drop in reserve requirements for banks.
Eleven traders and analysts, or 52.4% of 21 participants, in the snap poll predicted no change in either the one-year prime lending rate (LPR) or the five-year term.
The remaining 10 respondents expect a reduction in LPR to one year. Nine participants foresee a marginal reduction of 5 basis points, and one foresees a reduction of 10 basis points.
The one-year LPR was the latest at 3.85% and the five-year rate stood at 4.65%.
The mixed expectations come after China’s central bank slashed the amount of liquidity banks are required to hold as reserves, freeing up about 1 trillion yuan ($ 154.35 billion) in long-term liquidity to support its economic recovery post-COVID that was starting to run out of steam.
However, the People’s Bank of China (PBOC) kept borrowing costs for the Medium-Term Loan Facility (MLF), which serves as a guide for the LPR, unchanged in its last operation last week, when it partially renewed maturing loans.
“Although the PBOC recognizes that the downward pressure on growth is likely to increase in the second half of the year, it has been quite determined to contain financing for the real estate sector, which is a key signature of the ‘dual circulation’ strategy. “from Beijing,” said Lu Ting, chief of China. economist at Nomura. Lu expects the LPR to likely remain unchanged this month.
A plethora of economic data, including second-quarter GDP and June activity indicators, showed that China’s economic recovery may have peaked, suggesting further easing is still needed.
Chart: China GDP and Rates – https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxlzzgpx/Pasted%20image%201626342515440.png
China’s economy grew slightly slower than expected in the second quarter, weighed down by rising raw material costs and new outbreaks of COVID-19, as policymakers are expected to have to do more to support the recovery.
“The 1-year LPR is expected to drop 5 basis points on July 20 and an additional 5 basis points before year-end due to RRR cuts and reduced interest rate caps for term deposits over a year, “Li Wei, senior Chinese economist at Standard Chartered, said in a note.
The LPR is a benchmark loan rate set monthly by 18 banks.
The 21 survey responses were collected from selected participants on a private messaging platform.
($ 1 = 6.4788 Chinese yuan)
(Reuters Bond Team Report, written by Winni Zhou; edited by Jacqueline Wong)