China: PBoC expected to remain on hold in 2021 – UOB

Ho Woei Chen, CFA, Economist at UOB Group, suggested the PBoC would keep its monetary policy on hold throughout the next year.

Key Quotes

“As expected, the People’s Bank of China (PBoC) kept its Loan Prime Rate (LPR) unchanged in October for the sixth consecutive month. The 1Y LPR and the 5Y & above LPR were set at 3.85% and 4.65% respectively.”

“The decision is in line with PBoC’s decision to keep its 1Y medium-term lending facility (MLF) unchanged at 2.95% last Thursday (15 Oct) while it continued to inject liquidity into the system via the MLFs and reverse repo operations to offset the impact from tax payments. The higher interbank rate is also seen limiting the scope for any LPR cut.”

“China’s GDP growth accelerated to 4.9% y/y in 3Q20 (2Q20: 3.2% y/y) with the economic data for September showing that the recovery is gaining further traction. We expect growth to return to potential rate of 6.2% y/y in 4Q20 for full-year growth of 1.9%. This would reduce the need for further cuts to the interest rates or banks’ reserve requirement ratio (RRR), considering the strong flow of credit to the real sector in the first three quarters of the year.”

“Nonetheless, the PBoC is likely to maintain current monetary policy stance to provide targeted support to businesses as well as sufficient liquidity in the system. We maintain our forecast for the 1Y LPR and the 5Y & above LPR to be kept unchanged at 3.85% and 4.65% respectively into 2021.”