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Economist Ho Woei Chen, CFA, at UOB Group, reviewed the latest interest rate cut by the PBoC.

Key Quotes

“The People’s Bank of China (PBoC) cut its 1Y medium-term facility (MLF) rate by 20 bps to record low 2.95% today, matching a similar cut to its 7-day reverse repo rate on 30 March. The first 50bps reduction to the banks’ reserve requirement ratio (RRR) announced earlier this month has also become effective today… with the second 50bps cut effective a month later.”

“According to the PBoC, the MLF cut injected CNY100 bn (US$14.2 bn) of liquidity into the financial system. The MLF cut came just before next loan prime rate (LPR) fixing on 20 April and the 1Q2020 GDP release (17 April), which is expected to post its first quarterly GDP contraction since the data was available in 1992.”

“To put matters into perspective, the 20 bps cut to the 1Y MLF is the largest since 2016 with the previous reduction in February at 10 bps. The relatively steep cut may be a signal that the PBoC is gearing up for more monetary policy easing in the near-term to contain the downside growth risk.”

“As the benchmark Loan Prime Rate (LPR) is pegged to the MLF, we anticipate that the 1Y and 5Y & above LPR could fall around 10 bps at the upcoming monthly fixing on 20 April to reflect the lower funding costs.”

“Overall, the PBoC is likely to maintain its measured and targeted approach so far especially as the domestic economy has started to stabilise.”

“Further policy support measures from the authorities are expected as downside risks to growth increase with a more prolonged outlook for COVID-19 pandemic globally. Other than the gradual LPR cuts, there is room for another one to two rounds of RRR cut in the next 3-6 months.”