China widely expected to trim lending benchmark LPR: analysts

SHANGHAI (Reuters) - China is widely expected to cut its benchmark lending rate on Thursday, according to a survey of traders and analysts, after the central bank lowered the interest rate on medium-term loans earlier this week.

FILE PHOTO: Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee/File Photo

All 51 respondents in the snap survey expected a reduction in the loan prime rate (LPR) at the central bank’s monthly fixing on Thursday morning.

Among them, 38 respondents, or about 75% of participants, expected both the one-year CNYLPR1Y=CFXS and the five-year CNYLPR5Y=CFXS LPR to be lowered by 10 basis points.

China’s central bank cut the interest rate on its one-year medium-term lending facility (MLF) on Monday as policymakers sought to offset the impact on businesses from the coronavirus outbreak.

“The reduction to the LPR should be in line with the cut to the interest rate on the MLF loans,” Aidan Yao, senior Emerging Asia economist at AXA Investment Managers said, though he expects future reductions to the lending benchmark will be deeper given the two rates have an 100 basis points gap.

MLF, one of the main tools of the People's Bank of China (PBOC) in flexibly managing longer-term liquidity in the banking system, serves as a guide for the new LPR. The one-year MLF rate CNMLF1YRRP=PBOC stands at 3.15%.

The fast-spreading coronavirus epidemic has already killed more than 2,000 people, though the number of new cases fell for a second straight day according to official data reported on Wednesday.

The coronavirus outbreak hit the Chinese economy just as it was starting to show some signs of stabilizing after growth cooled in 2019 to its slowest pace in nearly 30 years. Many investors believe the authorities will roll out more monetary easing to prop up the broad economy.

Thirty-eight respondents participated in a separate survey, where 42% expected a reduction in the bank reserve requirement ratio (RRR) in the first quarter of this year. Thirteen expected the cut to be announced in March.

However, a majority of the 39 traders and analysts who took part in a third survey did not expect a cut to the central bank’s benchmark deposit rate in the near term. Only nine expected such a rate cut in the first quarter of this year.

Some central bank officials have recently said that lowering the deposit rate would reduce banks’ funding costs, giving them more incentive to cut the interest rates they charge on loans to companies and consumers without squeezing their profit margins.

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 MLF rate.

All 51 responses in the survey were collected from selected participants on a private messaging platform.

Reporting by Li Hongwei, Steven Bian, Wu Fang, Hou Xiangming, Zhang Xiaochong and Brenda Goh; Writing by Winni Zhou; Editing by David Holmes