China: Banks cut LPRs by larger than expected pace in October – UOB Group

Chinese banks lowered the loan prime rates (LPR) by 25 bps at October’s fixing, bringing the 1Y and 5Y LPR to 3.10% and 3.60% respectively. The size of the rate cuts was the largest on record and came above consensus and our forecasts for 20 bps as banks heed PBOC’s call to lower borrowing costs amid the economic slowdown and persistent deflation risks, UOB Group’s Economist Ho Woei Chen notes.

Banks cut LPRs by 25 bps in October

“Chinese banks lowered the loan prime rates (LPR) by a larger than expected 25 bps at October’s fixing, bringing the 1Y and 5Y LPR to 3.10% and 3.60% respectively.”

“This is a follow through from PBOC’s cut to the key 7-day reverse repo rate (-20 bps), the 1Y medium-term lending facility rate (-30 bps) and banks’ reserve requirement ratio (-50 bps) in late-September. Cumulatively, the 1Y LPR and 5Y LPR have been cut by a record 35 bps and 60 bps respectively this year.”

“Keeping in mind the impact on the limits of progressively lower interest rates, we think the PBOC is likely done with its interest rate cuts for the year but there is still room for another 25-50 bps reduction to the banks’ reserve requirement ratio (RRR) by end-2024 as guided by the central bank. This will release more liquidity to replace the large amount of maturing 1Y medium-term lending facility (MLF) in the next few months.”