The ING Bank Analysts note that China announced the liberalization of its interest rate system on 17th August, leading it one step closer to a free-floating currency system.
Key Quotes:
“China announced that the Loan Prime Rate (LPR) has be to quoted to customers. And the formation of LPR will be priced on a +/- basis point basis from open market operation interest rates.
Initially, the open market operation interest rate chosen is the Medium-Term Lending rate (MLF). The MLF is currently quoted in 1Y mostly but will add a 5Y quote, so that the LPR curve is more applicable to bank loans.
Such liberalization is part of a process towards achieving freely quoted bank interest rates to customers.
We don’t believe that lower interest rate system from the competition of banks will guide the USDCNY. The USDCNY is still guided by the daily fixing. As such this policy doesn’t change our forecast of USDCNY at 7.10 by end of 2019.”
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