China Keeps Lending Rates Unchanged

China left its benchmark lending rates unchanged on Wednesday, confounding expectations for a reduction, as the People’s Bank of China opted for a more cautious stance to further easing.

The one-year loan prime rate, or LPR, was retained at 3.70 percent and the five-year LPR, the benchmark for mortgage rates, was maintained at 4.60 percent.

Although the one-year medium-term lending facility, the forerunner of LPR, was kept unchanged last week, economists expected a slight reduction in the LPR today.

The previous change in the one-year loan-prime rate was a 5 basis points cut in January, which was the second consecutive reduction.

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

For now, policymakers are mostly relying on targeted measures to help support firms hit by the latest virus wave, economists at Capital Economics said.

The reluctance to embrace more wholesale easing suggests that a strong stimulus-led rebound of the kind we saw in 2020 is not likely this year, economists added.

The central bank announced relief measures to companies and households affected by the lockdown, on Monday. This included ensuring enough supply of funds to small and medium-sized companies.

Last week, the PBoC lowered the reserve requirement ratio by 0.25 percentage points. The reduction freed up CNY 530 billion in long-term liquidity. The weighted average RRR for Chinese financial institutions now stands at 8.1 percent.

Official data showed on Monday that the Chinese economy expanded at a faster pace of 4.8 percent in the first quarter despite the COVID-19 pandemic restrictions hitting consumption and heightened geopolitical risks.

That said, the retail sales and industrial production data for the month of March were tepid suggesting weakness in coming months in the backdrop of supply disruptions due to the lockdown restrictions in some regions to curb a fresh wave of Covid infections.

For the whole year of 2022, the government targets around 5.5 percent growth.

The International Monetary Fund, on Tuesday, downgraded China’s growth forecast for this year to 4.4 percent from 4.8 percent. The outlook for next year was trimmed to 5.1 percent from 5.2 percent.

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