China leaves LPR for lending unchanged, but expectations of a rate hike are rising

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SHANGHAI (Reuters) – China left its corporate and household credit rate unchanged as expected at the December fix on Monday, although improving economic fundamentals sparked speculation about a rate hike next year.

FILE PHOTO: A masked man walks past the headquarters of the People’s Bank of China, the central bank, in Beijing, China as the country is struck by a new coronavirus outbreak on Feb.3, 2020. REUTERS / Jason Lee

The prime rate on one-year loans (LPR) was left at 3.85%, while the LPR remained at 4.65% for five years. Prices have been unchanged for eight months in a row.

For the year, the one-year LPR declined 30 basis points overall from rate cuts, and the five-year LPR was cut 15 basis points from two rate cuts in 2020.

Most new and outstanding loans are based on the LPR, while the five-year rate affects mortgage pricing.

All 34 traders and analysts predicted no change in one-year or five-year LPRs in a brief Reuters poll conducted last week.

The interest rate decision reflected the ongoing economic recovery from coronavirus shocks in the world’s second-largest economy, and came after the central bank made its largest medium-term injection of liquidity to date last week.

The interest rate on these loans remained unchanged for the eighth straight month after recent corporate bond defaults shook investor confidence and prevented new issues.

With the economy back on track, some senior central bank officials have recently raised the issue of the exit from loose monetary policy repeatedly.

The annual Central Economic Work Conference, a gathering of leaders and policy makers, said last week that China will continue to support its economic recovery and avoid sudden policy changes in order to keep economic growth within reasonable limits.

“The conference changed the tone of prudent monetary policy to be ‘reasonably reasonable’, calling for broadly stable macro-debt and M2 and TSF growth that are ‘compatible’ with nominal GDP growth,” said Wang Tao, chief economist for China at UBS, a small rate hike in the second half of next year.

Julian Evans-Pritchard, chief China economist at Capital Economics, said in a note that subtle language changes in the past had signaled impending monetary policy changes and therefore expected PBOC rates to rise 30 basis points in 2021.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Tom Hogue and Sam Holmes

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