Economist at UOB Group HO Woei Chen, CFA, reviews the latest interest rate decision by the PBoC.

Key Takeaways

Chinese banks set the 1Y loan prime rate (LPR) 10 bps lower at 3.45% while keeping the 5Y LPR unchanged at 4.20%. The move is largely disappointing considering the mounting growth risks in China’s economy. Bloomberg’s poll showed expectation of 10-15 bps cut for the 1Y LPR and 10-20 bps cut for the 5Y LPR in Aug. 

The deflationary backdrop has provided some room for the PBOC to ease its monetary policy further in the near-term while the PBOC has asked banks to increase financial support to the real economy. 

We continue to expect banks to adjust their LPRs lower in the coming months. We also expect another 25 bps cut to banks’ reserve requirement ratio (RRR) in 3Q23. Our forecast for the 1Y LPR is now at 3.40% end-3Q23 and 3.35% end4Q23 while our forecast for the 5Y LPR is at 4.05% end-3Q23 and 4.00% end4Q23. 

The prospect of massive support measures remains low at this point due to the policymakers’ worries over debt sustainability and moral hazard problem.