Chinese banks hold interest rates as analysts bet on easing soon

(Bloomberg) – Chinese lenders followed the central bank by keeping interest rates unchanged on Monday, with analysts expecting possible cuts in the coming months to support the economic recovery.

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The benchmark one-year lending rate was held at 3.65% for the sixth straight month, in line with forecasts by all 13 economists polled by Bloomberg. The five-year interest rate, a benchmark for mortgages, was also kept as expected at 4.3%, data from the People’s Bank of China showed.

Lending rates are based on one of the PBOC’s benchmark rates, which was kept unchanged last week amid signs of a recovery in demand for corporate credit. The central bank is assessing the economy’s need for more stimulus as the latest indicators point to a faster-than-expected recovery after the lifting of Covid restrictions.

Still, the PBOC could cut interest rates and lower bank lending rates in the coming months, according to several analysts, as growth prospects are challenged by a real estate slowdown, weaker exports and weak consumer confidence.

“There are clear signs of recovery in the service sector, which has been battered by the pandemic, but household confidence remains weak on the backlog of Covid-related income shocks and the property recovery is still shaky,” said Michelle Lam, Greater China -Economist at Societe Generale SA.

The LPRs are based on the interest rates offered by 18 banks to their best customers and are published monthly by the PBOC. They are presented as a premium to the medium-term credit facility – the PBOC’s one-year loans – which has remained unchanged since August.

What Bloomberg Economics Says…

However, we still believe the recovery will require an additional monetary boost and see rates falling over the next month or so – even more so if activity data disappoints in the first quarter.

… We expect the MLF rate to be cut by 10 basis points in March or April. That should lower LPR rates as well.

— Eric Zhu, economist

Click here to read the full report.

The uneven recovery is evident in the latest credit data. Corporate borrowing rose sharply in January after the PBOC urged banks to “frontload” loan extensions and help support the economy. However, consumers remained cautious and rushed to prepay their mortgages.

Stronger demand for credit has led in part to tightening liquidity conditions and a rise in interbank lending rates in recent weeks. The central bank stepped in last week to add more cash to the interbank market to ease cash shortages.

Cuts in PBOC interest rates are “still a possibility if optimism fades and growth starts to evaporate in a few months,” said Winson Phoon, head of fixed income research at Maybank Securities Pte Ltd in Singapore.

–Assisted by Chester Yung.

(Updated continuously.)