China keeps lending rate steady, stimulus needed as virus hit worsens

Pedestrians walk past the People’s Bank of China headquarters in Beijing, China, on January 7, 2019.

Giulia Marchi | Bloomberg | Getty Images

China kept its benchmark lending rate unchanged on Friday, defying expectations for a reduction to ease borrowing costs in an economy jolted by widespread disruptions to businesses from the coronavirus pandemic.

The one-year loan prime rate was left unchanged at 4.05% from the previous monthly fixing while the five-year LPR remained at 4.75%.

Analysts said the unchanged rate suggests policymakers may think recent measures are enough to help the economy in the immediate term, after the central bank last week cut the amount of reserves commercial banks are required to hold.

Forty respondents, or 71.4% of all participants, in a Reuters snap survey had expected a reduction in the LPR, with 36 predicting either a five basis point or 10 basis point cut in the one-year tenor and no change to the five-year rate.

But while the People’s Bank of China (PBOC) has rolled out powerful easing measures since the coronavirus outbreak, many economists said it was still not enough to revive demand in the current environment.

“The lack of any cut this month means that the LPR is still only 10 basis points lower than it was at the end of last year, following a small cut in February,” Julian Evans-Pritchard, senior China economist at Capital Economics said in a note.

“But with the economy unlikely to get back on track until next year, further monetary easing will be needed to help address the continued strain on corporate and households balance sheets.”

The virus situation has gradually stabilized in mainland China with no new domestic transmissions reported on Thursday for the first time, raising hopes that strict containment efforts to stop the spread of the virus are working.

 But the situation overseas remains concerning. With over 242,000 infections and nearly 10,000 deaths, the epidemic has stunned the world and drawn comparisons with painful periods such as World War Two, the 2008 financial crisis and the 1918 Spanish flu.

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August, loosely pegging it to the medium-term lending facility rate.

The PBOC left borrowing cost on its one-year medium-term lending facility (MLF) loans unchanged on Monday, despite its U.S. counterpart’s decision to slash interest rates to near zero to counteract the economic shock from the coronavirus outbreak.

Source: https://www.cnbc.com/2020/03/20/china-keeps-lending-rate-steady-stimulus-needed-as-virus-hit-worsens.html

Leave a Reply