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China likely to keep lending benchmark LPR unchanged amid global central bank tightening

About 90% of traders and analysts in a Reuters survey expected China to keep benchmark interest rates unchanged at its monthly fixing on Monday, as global central bank tightening limited room for policy manoeuvre to arrest economic slowdown.

The loan prime rate (LPR), which banks normally charge their best clients, is set on the 20th of each month, when 18 designated commercial banks submit proposed rates to the People’s Bank of China (PBOC).

Twenty-three out of 26 respondents in the Reuters snap poll predicted no change to either the one-year or the five-year LPRs.

Of the other three, one expected a marginal reduction of 5 basis points to the one-year LPR, one saw a cut to the five-year rate by the same margin, and the third forecast a cut to both rates.

Lower interest rates would help revive a Chinese economy battered by anti-pandemic measures, but traders and analysts note that the PBOC this week left unchanged its medium-term policy rate, which is a guide to the LPR.

This reaffirmed market views that policymakers were wary of reducing interest rates as other countries tightened, since doing so would put downward pressure on the exchange rate. The PBOC keeps the yuan under tight control.

“China has long maintained an independent monetary policy, but at this stage it will focus more on balancing internal and external conditions, trying to avoid a direct collision in monetary policy stance” with the United States, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating.

Central banks across Europe raised interest rates on Thursday, some by amounts that shocked markets, in the wake of the U.S. Federal Reserve’s 75-basis-point hike to combat high inflation.

“If the challenges facing Western central banks today teach any lesson for China, it is that monetary policy should not be too lax,” said economists at BNP Paribas.

“The PBOC has been vocal in its criticism over reckless monetary accommodation in (developed) countries in the past couple of years. Therefore, the PBOC has been more restrained in easing.”

The central bank lowered the five-year LPR by 15 basis points last month. Some traders said that it did so to revive China’s ailing housing sector and that, after only one month, the effect could not yet be gauged.

However, Iris Pang, chief economist for Greater China at ING, thinks the five-year LPR could be lowered again this month.

“Cutting the 5-year prime rate implies interest rates for mortgages and long-term loans will decline,” she said.

“Infrastructure projects may also benefit from lower interest costs.”
Source: Reuters (Reporting by Xiangming Hou and Andrew Galbraith, Writing by Winni Zhou; Editing by Bradley Perrett)

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