Further easing by the PBoC stays on the cards – UOB

Economist Ho Woei Chen, CFA, at UOB Group, reviewed the recently announced easing measures by the PBoC.

Key Quotes

“The People’s Bank of China (PBoC) cut the 1Y Medium-term Lending Facility (MLF) rate by 10 bps to 3.15%, following similar moves on the 7-day reverse repo and 14-day reverse repo rates on 3 February, to 2.40% and 2.55% respectively. With the Loan Prime Rate (LPR) pegged to the MLF, the MLF cut is expected to translate to a reduction in the LPR by the same magnitude on the setting date this Thursday (20 February).”

“We expect the longer-tenor LPR (5Y & above) to also reflect this MLF cut. The MLF was last cut by 5 bps on 5 November 2019, leading to a drop in the LPR for both 1Y and 5Y & above tenors by 5 bps later in the month. Thus, the move today is expected to see the 1Y LPR at 4.05% on 20 February from current 4.15% and the 5Y & above LPR at 4.70% from 4.80%.”

“The MLF cut today clearly signals China’s monetary policy continues to be targeted at maintaining “reasonably ample” market liquidity. We have earlier expected a total of 25 bps cut to the LPR this year and this amount is now likely to be frontloaded in 1Q20 to cushion the negative growth impact from the novel coronavirus (COVID-19) outbreak. If the outbreak is not contained by early-2Q20, then there is likelihood for a more aggressive interest rate cut in China this year.”

“Other than interest rate cuts, we expect the PBoC to reduce bank’s reserve requirement ratio (RRR) as a further boost to the credit channels. After the 150 bps cut in banks’ RRR in 2019 and another 50 bps cut in January 2020, we are still projecting at least one more RRR cut within the next 3-6 months.”