Economist Ho Wiei Chen, CFA at UOB Group assessed the recent move by the PBoC on the Medium-term Lending facility (MLF).
Key Quotes
“The People’s Bank of China (PBoC) cut the 1Y Medium-term Lending Facility (MLF) rate by 5 bps to 3.25%… marking the first reduction since March 2016″.
“As the revamped Loan Prime Rate (LPR) is pegged to the MLF, we anticipate the LPR to fall by 5-10 bps at the upcoming monthly fixing on 20 November, with the reverse repo rates moving lower in tandem”.
“Other than interest rate cuts, the PBoC has also been lowering banks’ reserve requirement ratio (RRR) to ensure credit availability and lower costs of funds to businesses, in particular the small and private companies to cushion the impact of the slower growth”.
“We continue to expect monetary policy easing in China amid subdued demand-side inflation (most of the domestic inflation was driven by food prices while PPI stayed in deflation) and considerable growth risks ahead. However, we expect PBoC to move in a very gradual manner in order to maintain sufficient policy space, while Chinese policy makers have often cautioned against flooding the economy with stimulus which could undermine the financial system stability in the longer term”.
“With the latest cut to the MLF today, we maintain our forecast that the LPR would be heading lower in the coming months which could be achieved partly through further cuts to the MLF. Our projections remain for the LPR fixing to move lower towards 3.90% by end-4Q19 and then to 3.65% by end-1Q20″.
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