As anticipated, the People’s Bank of China (PBoC) left the benchmark lending rates unchanged for the second successive month. The prime rate for a one-year loan was maintained at 4.15% and the prime rate for five-year loans at 4.80%. The last time the central bank slashed interest rates was in November. It was the first interest rate reduction after the introduction of a new lending rate.
Capital Economics had earlier predicted that PBoC would slash the rate to 4.10% amidst the recent reduction in bank financing costs from the cut in reserve requirement ration and decline in short-term interbank rates.
On a monthly basis, the loan prime rate (LPR) is fixed with inputs from 18 banks, although the Chinese government wields considerable influence over rate-setting. The latest lending rate substituted the central bank’s conventional benchmark lending rate in August last year.
The central bank of China has started an initiative to overhaul the LPR system in August 2019 to indicate the changes in the market in a better manner, leading to a reduction in borrowing expenses and improvement in the real economy.
In addition to leaving the loan prime rate unchanged, the PBoC increased the liquidity in the financial system by CNY 250 billion through reverse repo. By carrying out central bank bills swap (CBS), the liquidity of perpetual bonds was increased. Notably, CNY 6 billion worth CBS becomes mature on April 20th, 2020.
While speaking to CNBC, Kevin Leung, executive director of investment strategy at Haitong International Securities, said: “We still expect some changes to the LPR at some point this year, even though we’re not seeing that as early as like the first month of the year right now.”
As per last week’s official data, China’s economic growth slowed down to 6.1% in 2019, the lowest level in almost three decades. Nevertheless, the economic activity improved by the end of 4Q 2019.
Julian Evans-Pritchard, an economist at Capital Economics, opined that the PBoC is adopting a wait-and-watch approach due to the release of upbeat economic data in the recent past.
The economist, however, believes that the increase in the rate of economic growth may not sustain. Julian Evans-Pritchard said, “But with a slowdown in property construction only just getting underway, we are skeptical that the latest uptick in economic activity marks the start of a sustained turnaround.”
The economist anticipates LPR to decrease by another 50 basis points by the end of 2020.
The historical price chart indicates that the USD/CNY currency pair has made a bullish gap formation yesterday. Therefore, we can expect the greenback to rally further against the yuan in the days to come.
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