China Expected to Lower Lending Rates

SHANGHAI (Reuters) – China is anticipated to reduce its main policy and benchmark lending rates on Friday, according to a Reuters poll. This comes after the Federal Reserve’s significant interest rate cut eased some concerns regarding sharp declines in the yuan.

Monetary policy differences and a weakening yuan have constrained Beijing’s ability to loosen policy in recent years. However, with the U.S. central bank initiating its monetary easing cycle with a larger-than-usual half-percentage-point reduction, analysts believe that Beijing has more flexibility with its monetary policy.

The loan prime rate (LPR), typically charged to banks’ top clients, is determined each month based on submissions from 20 designated commercial banks to the People’s Bank of China (PBOC).

In a survey conducted this week of 39 market observers, 69% (27 respondents) expect both the one-year and five-year LPRs to decrease. Only 12 respondents diverged, with 2 predicting a reduction solely for the five-year LPR and 10 expecting no changes.

Market participants also anticipate the PBOC to lower the borrowing cost of the short-term liquidity tool (the seven-day reverse repo rate) before any LPR cuts.

China’s unexpected cuts to major interest rates in July aimed to revive economic growth after almost a year of minimal changes. Recent economic data from August, including indicators for credit lending and overall activity, fell short of expectations, heightening the urgency for more stimulus measures to support the economy.

Declining Chinese economic activity has led global brokerages to downgrade their 2024 growth forecasts for China, projecting them below the government’s target of approximately 5%.

President Xi Jinping recently urged authorities to pursue the country’s annual economic and social development objectives, as state media reported the anticipation of additional measures needed to reinforce an ongoing economic recovery.