China Leaves Key Rates Unchanged As Expected

China’s left its benchmark interest rates unchanged on Thursday, as the economy showed signs of robust recovery.

The one-year loan prime rate was retained at 3.85 percent and the five-year loan prime rate was maintained at 4.65 percent.

The one-year and five-year loan prime rates were last reduced in April. The one-year loan prime rate was lowered by 20 basis points and five-year rate by 10 basis points in April.

Markets had also expected the rates to be maintained today as the rate on its medium-term lending facility or MLF, which serves as a guide for the LPR, was retained early this month.

The loan prime rate is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This new lending rate replaced the central bank’s traditional benchmark lending rate in August 2019.

Iris Pang, an ING economist said she expects monetary policy on interest rates to remain the same for the rest of 2020 as China’s Covid-19 infection cases have been stabilized.

There will be no broad-based RRR cut, but there could be targeted RRR cut or targeted re-lending for SMEs and the agricultural sector, the economist noted. In the meantime, if liquidity tightens, the central bank will fine-tune it via daily open market operations, Pang added.

It seems that policymakers see little need to engineer a further decline in bank lending rates given the relatively rapid economic recovery and the continued prop from loose fiscal policy, which is set to drive a further improvement in activity in the coming months, Julian Evans-Pritchard, an economist at Capital Economics, said.

The economist said the next move in the LPR will be an increase, though probably not until next year once the economy has fully recovered and returned to its pre-virus growth path.

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