China to Keep Lending Rates Unchanged

SHANGHAI (Reuters) – China is expected to leave benchmark lending rates unchanged on Tuesday, as indicated by a Reuters poll, following a surprise cut in key interest rates in July.

Market analysts note that the shrinking interest margins at lenders are discouraging commercial banks from further lowering lending benchmarks, despite the general consensus that more stimulus is needed to support the fragile recovery of the world’s second-largest economy.

The loan prime rate (LPR), which is charged to banks’ best clients, is determined each month based on rates proposed by 20 designated commercial banks to the People’s Bank of China (PBOC).

In a recent Reuters survey of 37 market watchers, all respondents predicted that both one-year and five-year LPRs would remain unchanged.

In July, China surprised markets by cutting major short and long-term interest rates for the first time in almost a year, indicating policymakers’ commitment to bolstering economic growth. The one-year and five-year LPRs were reduced by 10 basis points to 3.35% and 3.85%, respectively.

Analysts at OCBC Bank commented, “China is tipped to keep its one- and five-year LPR static tomorrow after the surprise cuts last month.”

Official data indicated that commercial banks’ net interest margins (NIMs), a key profitability indicator, fell to a record low of 1.54% at the end of March this year. Additionally, bank lending decreased more than expected last month, reaching the lowest levels in nearly 15 years, influenced by weak credit demand and seasonal factors, raising the prospect of further easing by the central bank.

Furthermore, traders and analysts noted that the sequence of the interest rate cuts last month highlighted a change in the PBOC’s monetary framework, with a greater emphasis on the seven-day reverse repo rate as the main signal for market guidance.

Carlos Casanova, a senior economist for Asia at UBP, stated, “The PBOC is moving faster than expected to a new monetary policy framework, with a greater focus on money market rates and liquidity, which is not anticipated to change the expected path for another rate cut in the fourth quarter of 2024.”