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UOB Group’s Economist Ho Woei Chen, CFA, and Senior FX Strategist Peter Chia review the recent decision by the PBoC to leave the interest rate unchanged.

Key Quotes

“The People’s Bank of China (PBoC) kept its Loan Prime Rate (LPR) unchanged … with the 1Y LPR and the 5Y & above LPR set at 3.85% and 4.65% respectively. The decision was in line with expectation after the central bank kept its 1-year medium-term lending facility (MLF) rate unchanged at 2.95% and drained liquidity from the banking system last Friday.”

“Coronavirus resurgence that put some Chinese cities under lockdown has emerged as one of the key near-term risks, particularly with the Lunar New Year in February that typically sees mass movement of people. However, with the sustained momentum in economic recovery since 2Q20, the PBoC is not likely to add on more stimulus measures this year. Nonetheless, the downside risks may see a more cautious unwinding of its pandemic measures.”

“China has said that there will be “no sudden U-turn” of policy operations though emphasizing that monetary policy will be more flexible. There remains the need to maintain targeted support for key sectors and weaker parts of the economy given an expected easing of fiscal support, risk from rising bond defaults and coronavirus uncertainty. As such, we maintain our forecast for both the 1Y LPR and the 5Y & above LPR to be kept unchanged for the rest of 2021. We also do not expect any change to banks’ reserve requirement ratios (RRR) this year.”