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Economist at UOB Group Ho Woei Chen, CFA, gives her opinion on the latest 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 at the monthly fixing…”

“Last Friday also saw the PBoC inject CNY100 bn liquidity into the banking system via the MLF while the second part of the reserve requirement ratio (RRR) cut announced in April kicked in. The 50 bps reduction in RRR for small and medium-sized banks released an additional CNY200 bn liquidity into the financial system.”

“The central bank’s targeted measures and liquidity injections, rather than broad-based aggressive loosening of the monetary policy, are expected to continue in the coming months so long as domestic economic risks remain contained. This will help to maintain the recovery momentum in the domestic economy. Easing inflation as seen in the April CPI and sharper PPI deflation will create room for further monetary policy measures as signaled in the PBoC’s Monetary Policy Implementation Report for 1Q20.”

“The annual National People’s Congress (NPC) that opens this Friday (22 May) is likely to reaffirm the need to continue with counter-cyclical measures given the economic challenges. We expect the PBoC to resume easing monetary policy after the NPC. As such, we maintain our forecast for the 1Y LPR to be cut by 10 bps in June and expect another 20 bps rate reduction in the second half of the year. This will bring the 1Y LPR to 3.55% by end-4Q20.”

“We also see room for another one to two rounds of RRR cut in the next 3-6 months to reduce funding costs and increase the room for banks to expand credit and absorb higher government bonds issuance.”