Surprise drop in China’s RRR prompts markets to ponder rate cuts and other easing

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The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China on September 28, 2018. REUTERS / Jason Lee

SHANGHAI, July 14 (Reuters) – China’s surprise decision to lower its banks’ reserve requirements last week leads some market analysts to speculate that a cut in the country’s benchmark lending prime rate may be next , maybe next week.

The People’s Bank of China (PBOC) on Friday announced the reduction in the amount of liquidity banks must hold as reserves, releasing about 1,000 billion yuan ($ 154.43 billion), more than expected. It is effective from July 15.

While the majority of market participants believe that the RRR cut was intended to stabilize banks’ financing needs and reduce their costs to support credit growth, others believe that a cut in key rates would complement this new bias. conciliatory.

According to the latest Reuters poll released on Tuesday, the PBOC is expected to cut the RRR by another 50 basis points in the fourth quarter, as pressure on the economy persists while consumer inflation eases. Read more

Below are some comments from analysts and economists on the outlook for the Prime Lending Rate (LPR) and the Medium Term Loan Facility (MLF) rate. The PBOC is expected to make an MLF loan maturity announcement on Thursday, while the next LPR setting will take place on July 20:

QU QING, CHIEF ECONOMIST, JIANGHAI SECURITIES, BEIJING

“Reducing the RRR is one of the government’s regulatory tools, and its goal is to reduce the costs of financing businesses. The market is now focused on whether the LPR would be lowered as well.”

“If the LPR is lowered this month, the possibility of a subsequent rate cut on the Medium Term Loan Facility (MLF) will be lower. If the LPR is unchanged after the RRR cut this month, the MLF rate is likely to be lowered in the future to guide LPR reduction. “

“Overall, as the call for lower financing costs has not changed, and has become even more urgent, the chances of implementing various tools will not be excluded in the future.

MING MING, FIXED INCOME RESEARCH MANAGER, CITIC SECURITIES, BEIJING

“The impact of a reduction in the RRR and the benchmark deposit rate on lowering bank financing costs is likely to lower the LPR fixing rate. “

“Even if the MLF interest rate is not adjusted, the increase can be effectively reduced, which will be a relatively powerful push for the LPR’s downtrend.”

LU TING, CHIEF ECONOMIST, NOMURA, HONG KONG

“After this RRR reduction, we think the probability of another reduction before the end of this year is not great, maybe less than 50%, and if there is another reduction, it will be very probably a targeted reduction, instead of a universal reduction.And we believe the PBOC will rely more on its lending facilities such as MLF, on-lending and rediscounting to provide long-term liquidity if needed.

“If the PBOC cuts the MLF rate or the LPR rate later in the month, it could open the door for another rate rally. However, with our base scenario for no change in key rate levels, we believe that the likelihood of a significant rally in rates from current levels is not high and prefers to receive on rebounds. “

EUGENE LEOW, PRICE STRATEGIST, DBS GROUP RESEARCH, SINGAPORE

“There are a few things to note about the divergence of PBOC-Fed policies. First, the Fed is expected to decline by late 2021 / early 2022, while the PBoC has already eased.

“Second, the United States appears to have a higher tolerance for COVID-19 and seems more aggressive on the fiscal front. These could be more favorable to the US economy at this point in the cycle. By comparison, China has been more cautious on COVID-19 handling and more tax conservative.

“Given this development, we now see the 1-year LPR holding steady until 2022.”

WANG YIFENG, CHIEF ANALYST, EVERBRIGHT SECURITIES, BEIJING

“The LPR and the MLF are deeply rooted, and the MLF rate has played a benchmark role for the LPR. A decrease in RRR does not necessarily lead to a decrease in LPR. “

“The reduction in the RRR should save banks around 13 billion yuan in interest payments, and this translates into less than a basis point of the overall cost of bank debt … it is not enough to result in a downward adjustment of the LPR listing at this point. “

ZHANG JIQIANG, CHIEF ANALYST, HUATAI SECURITIES, BEIJING

“We think the odds of an MLF and OMO rate cut this month are not high, but let’s see the odds of an LPR cut.”

“According to a questionnaire we conducted, the majority of investors believed that 10-year (Chinese) T-bill yields could drop to 2.8% -2.9%… And we basically agree. “

The 10-year rate is now slightly below 3%.

MARCO SUN, CHIEF FINANCIAL MARKET ANALYST, MUFG BANK, SHANGHAI

“The initial intention of reducing the PBOC’s RRR was likely to cushion shocks to market liquidity and businesses … And the central bank could continue to maintain balanced market liquidity, so we maintain our forecast that China’s LPR will not be changed this year. “

HE WEI, CHINA ECONOMIST, GAVEKAL RESEARCH, BEIJING

“The State Council statement signals that policymakers may be more accommodating than previously thought. Given this surprise, it is now possible that the PBOC will make a slight 5 basis point cut. key rates in the second half of the year. “

($ 1 = 6.4755 Chinese yuan)

Reporting by Winni Zhou and Andrew Galbraith Editing by Vidya Ranganathan and Kim Coghill

Our Standards: The Thomson Reuters Trust Principles.


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