Economist at UOB Group Ho Woei Chen, CFA, reviews the leatest decision by the PBoC to reduce the policy rates.

Key Takeaways

“The People’s Bank of China (PBOC) set the benchmark 1Y Loan Prime Rate (LPR) lower by 10 bps to 3.70% and the 5Y LPR by a smaller quantum of 5 bps to 4.60% today. This was the second consecutive cut to the 1Y LPR following a 5 bps reduction in Dec. For the 5Y LPR, this was the first cut since May 2020 as it was kept unchanged in Dec.”

“The cut to 5Y LPR (which mortgages in China are pegged to) suggests some softening of the official stance towards the real estate market but the smaller cut still indicates that the PBOC wants to target support for the businesses rather than fueling a rebound in the real estate market.”

“While we think the PBOC has room to lower the LPR further, any further cuts will likely be small. We thus factor in another 15 bps cut to the LPR in 1H22 and the PBOC is likely to be on hold thereafter in 2H22.”

“Another 50 bps reduction in the banks’ reserve requirement ratio (RRR) is also likely in the pipeline to help guide the lending rates lower.”

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