Economist at UOB Group Ho Woei Chen, CFA, comments on the latest PBoC’s move on rates.
Key Takeaways
The PBOC has lowered financial institutions’ reserve requirement ratio (RRR) by 25 bps effective today (15 Sep). The move is within expectation as policymakers doubled down their efforts to boost the economy.
It also surprised markets by injecting a larger than expected amount of liquidity via the 1Y Medium-Term Lending Facility (MLF) today despite keeping the rate unchanged as expected. Looking ahead, there will be a further need to boost market liquidity as CNY3.76 tn of 1Y MLF will mature in the next two quarters.
Despite no further reduction in the 1Y MLF, we could still see the benchmark loan prime rates (LPRs) being adjusted lower at the upcoming rate setting on 20 Sep as the earlier MLF cut in Aug has not been fully passed through to the LPRs. Our forecast for the 1Y LPR is at 3.40% end-3Q23 and 3.35% end-4Q23 while our forecast for the 5Y LPR is at 4.05% end-3Q23 and 4.00% end-4Q23.
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