China likely to cut key lending rates amid economic slowdown

June 19, 2023 (MLN): China's central bank is expected to lower key lending rates on Tuesday for the first time in almost a year, according to most experts.

The People's Bank of China (PBOC) cut its short-term lending rate last week, the first such move since August 2022, as the country stepped up measures to consolidate economic recovery and restore market confidence amid downward pressure.

According to the recent economic data, the retail and factory sectors have lost steam since the first quarter. This has sparked fears that China’s post-pandemic rebound could stall this year and cause massive job losses.

David Chao, global market strategist for Asia Pacific at Invesco said that "traditionally, cuts to the medium-term lending facility (MLF) and open market operations (OMO) rates mean that we can expect a similar sized cut to the bank prime loan rate relatively soon," as Reuters reported.

"However, the biggest risk is that rate cuts can be ineffective when households and businesses are excessively conservative, busy deleveraging and paying off debt."

Chao expects policymakers to introduce additional targeted fiscal and stimulus measures.

China's cabinet met on Friday to discuss measures to spur growth in the economy and pledged to roll out more policy support.

Despite the strong consensus on cuts to the LPR on Tuesday, market participants are divided on the size of the reductions. Some expect the mortgage reference rate could be trimmed by a deeper cut to aid the ailing property sector.

"We are expecting an asymmetric cut with five basis points in one-year LPR and 15 bps in five-year LPR, as the property sector is clearly warranting more policy support," Citi analysts said in a note.

"We continue to see the July Politburo meeting as a window to watch if more significant moves are following."

Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the post-COVID recovery was faltering.

The LPR normally charged to banks' best clients is calculated each month after 18 designated commercial banks submit proposed rates to the central bank.

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