China unexpectedly keeps lending benchmark unchanged – Metro US
China unexpectedly keeps lending benchmark unchanged – Metro US

China unexpectedly keeps lending benchmark unchanged – Metro US

SHANGHAI (Reuters) -China surprisingly kept its benchmark lending rates stable on Wednesday, as markets saw the move as Beijing’s cautious approach to roll out more easing measures as the economy slows due to COVID-19 lockdowns.

Unlike most major economies, which have begun to tighten monetary policy to combat inflation, China has stepped up its easing to mitigate the slowdown.

But such a political divergence with the major central banks could lead to capital outflows, increasing pressure on the yuan.

The one-year prime interest rate (LPR) was kept at 3.70% and the five-year LPR was unchanged at 4.60%.

Marco Sun, chief financial market analyst at MUFG Bank, said political divergence between China and the US is likely to continue despite stable LPRs in April, as the PBOC’s political stance appeared to be more dove-like.

“Recovery from COVID is a challenging task for global policy makers,” Sun said, adding that the economic impact of the latest wave of COVID-19 infections remains uncertain.

Sun still sees a chance to lower LPR in the second quarter of this year.

A large majority of the 28 traders and analysts surveyed in a quick Reuters poll this week expected a reduction this month. Among them, 11, or 39% of all respondents, predicted a marginal reduction of 5 basis points in both rates.

Last week, the PBOC lowered the amount of cash that banks have to set aside as reserves by a smaller than expected margin to provide a relatively modest cash injection.

Global investment banks including Goldman Sachs said the PBOC’s restraint may reflect concerns over inflation and aggressive monetary tightening by the US Federal Reserve.

Separately, some market participants pointed out that the recent robust credit growth could also be part of the reason why banks refrained from lowering lending benchmarks.

“The pristine LPR suggests that lending demand is now not bad in the banks’ views,” said Xing Zhaopeng, senior China strategist at ANZ.

“We may need patience to observe more credit data,” he said, adding that LPR could still be lowered this year as credit growth worsens, although PBOC is reluctant to cut back on the medium-term lending facility (MLF), which acts as a guide to LPR.

New bank lending in China rose more than expected in March, while broad credit growth accelerated from the previous month.

Most new and outstanding loans in China are based on the annual LPR. The five-year interest rate affects the pricing of mortgages.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Muralikumar Anantharaman and Jacqueline Wong)

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