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Economist Ho Woei Chen, CFA, at UOB Group, reviewed the recent decision by the PBoC to cut interest rates.

Key Quotes

“The People’s Bank of China (PBoC) cut the Loan Prime Rate (LPR) … after keeping it steady in the last two months… This follows the 10 bps cut to the 1Y Medium-term Lending Facility (MLF) rate to 3.15% on Monday (17 February) and similar moves on the 7-day reverse repo and 14-day reverse repo rates on 3 February, to 2.40% and 2.55% respectively.”

“As the LPR is pegged to the MLF, a direct cut to the MLF rate clearly signals the PBoC’s intention to lower domestic funding costs including for longer tenor loans (i.e. 5Y & above LPR).”

“After the cut, we still anticipate further lowering of the LPR to cushion the economy from the novel coronavirus (COVID-19) outbreak. For now, we expect the 1Y LPR to fall to 3.95% by end-1Q20 which factors in another 10bps cut in March. Consistent with our view of a peaking of COVID-19 cases by end-April, we expect a further 15bps cut to the 1Y LPR in 2Q20 (-10bps in April and -5bps in May) to bring the rate to 3.80% by 2Q20.”