PBoC: Further easing looks unabated – UOB

Ho Woei Chen, CFA, Economist at UOB Group, assessed the recent monetary policy decision by the PBoC.

Key Quotes

“The People’s Bank of China (PBoC) kept its benchmark 1Y Loan Prime Rate (LPR) and the 5Y & above LPR unchanged at 3.85% and 4.65% respectively in June. This is the second consecutive month that PBoC stays put after the larger-than-usual reduction in April and is in line with consensus expectation though we had expected a cut this month.”

“Year-to-date, the 1Y and 5Y & above LPR have moved down by a total of 30 bps and 15 bps, respectively. The largest move came in April when the PBoC cut the 1Y and 5Y & above LPR by 20 bps and 10 bps respectively. The interest rate on 1Y medium-term lending facility (MLF) loans to financial institutions which the LPR is pegged to, stands at 2.95% after 30 bps cut YTD.”

“Last Thursday, the PBoC cut the 14-day reverse repo rate by 20 bps to 2.35%, to realign it with the more widely-used 7-day reverse repo which was cut by 20 bps to 2.20% in March. The 7-day reverse repo rate was kept unchanged last week.”

“With the State Council renewing its commitment to reduce funding costs for firms last Wednesday, we continue to expect the LPR to be lowered gradually while banks’ reserve requirement ratio (RRR) will also be cut further to facilitate the credit expansion and allow banks to absorb the RMB1 trillion of special treasury bonds issuance which is targeted for completion by end-July. The easing inflation will provide more room for monetary easing, we maintain our forecast for 1Y LPR to fall to 3.60% by end-3Q20 and 3.55% by end-4Q20.”