China lowers rate by 5 basis points – ING

Iris Pang, economist at ING, points out that the People's Bank of China (PBoC), China's central bank, cut 5 basis points off the 1-year Medium Lending Facility (MLF) as expected, bringing the pause in monetary policy from September to an end.

Key Quotes

“This is a return to the slow rate cut trend that existed before the September pause. 3M repo rates have increased from a range of 2.55%-2.9% in 1Q19 to around 2.80% to 3.3% since September.”

“The main lending rate, which is now the Loan Prime Rate (LPR), should face downward pressure on 20th November. According to the PBoC, the Loan Prime Rate should reference market rates, including the MLF, and consider adjustments on the 20th of every month.”

“As such, we expect the LPR to fall by 5 basis points for 1-year loans from 4.20% to 4.15%.”

“For 5-year rates, they have stayed at 4.85% since the start of the formation of the LPR. It seems to us that the central bank would like to avoid the curve flattening, but as liquidity has tightened since September's pause, it is also possible that the central bank will cut the 5-year LPR from 4.85% to 4.80%.”

“We expect the slow rate cut trend to continue into 2020 but with slower momentum, as we expect some progress to be made in the trade talks. At the same time, we expect the trade war will still persist, with no complete trade agreement.”

“To conclude, we expect one more rate cut of 5bps and two more RRR cuts (each of 0.5 percentage points) in 2020. The lower interest rate in China has little to do with the exchange rate as the capital account is still semi-closed. Arbitraging activities are to move the yuan softer against the dollar are thin.”