China leaves lending benchmarks unchanged amid tighter global rates

People wearing face masks walk past the headquarters of China’s central bank People’s Bank of China (PBOC), April 4, 2020. REUTERS/Tingshu Wang/File Photo/File Photo

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SHANGHAI, Sept 20 (Reuters) – China kept key rates unchanged at a monthly fixing on Tuesday, as expected, as authorities appeared to delay immediate monetary easing following the local currency’s rapid decline and central banks tightened their policy.

The decision came days before the Federal Reserve’s policy meeting in September, at which the US central bank is expected to make another hawkish interest rate hike to stem runaway price increases.

The growing divergence in the monetary policies of the world’s two largest economies could stoke fears of capital flight out of China, just as Beijing seeks to mobilize resources to revive sluggish growth.

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The one-year loan prime rate (LPR) was held at 3.65%, while the five-year LPR remained unchanged at 4.30%.

In a Reuters poll this week, 21 out of 28 respondents, or 75% of all participants, predicted no change in either rate.

The LPR’s steady fixings came after the People’s Bank of China (PBOC) last week left its key medium-term rate unchanged, while draining some liquidity from the banking system. Read more

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The medium-term loan facility (MLF) cost of borrowing serves as a guide for the LPR, and markets generally use the medium-term rate as a precursor to any changes in lending criteria.

“It should come as no surprise as the MLF rate has been flat before,” said Frances Cheung, rate strategist at OCBC Bank.

“Still, the LPR reflects the overall funding costs of banks that have a downside margin with deposit rates trending lower,” Cheung added, noting that some of China’s largest banks have lowered retail deposit rates. last week to ease pressure on margins. Read more

Analysts said policymakers are carefully balancing between supporting a slowing economy and not creating new economic risks.

Beijing’s policy divergence from most other major economies, which are raising interest rates aggressively to rein in inflation, has piled pressure on the currency and limited room for further monetary easing.

China cut key interest rates in August as Beijing stepped up efforts to revive an economy hampered by a housing crisis and a resurgence in COVID-19 cases. Read more

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But these rate cuts accelerated the decline of the yuan. It has lost about 4% against the dollar since mid-August, breaking through the psychologically important 7 to the dollar mark and triggering capital flight risks.

“Outright rate cuts have always been just one of the options in the PBOC’s toolkit and RMB weakness has further reduced the chances of rate cuts,” OCBC’s Cheung said.

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The LPR, which banks normally charge their best customers, is set by 18 designated commercial banks that submit proposed rates to the PBOC each month.

Most new and existing loans in China are based on the one-year LPR, while the five-year rate influences mortgage pricing.

Marco Sun, chief financial market analyst at MUFG Bank (China), said economic indicators surprised on the upside in August. Read more

“If the recent economic recovery is not sustainable, the Chinese authorities are still likely to lower interest rates further,” Sun added, expecting possible monetary easing in the fourth quarter.

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Reporting by Winni Zhou and Brenda Goh, graphics by Riddhima Talwani; Editing by Sam Holmes

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