Economist Ho Woei Chen at UOB Group comments on the latest interest rate decisions by the PBoC.

Key Takeaways

“From 27 Mar, banks’ reserve requirement ratio (RRR) will be lowered by 25 bps to bring the effective RRR to 7.6%.”

“The 25 bps cut to the RRR is estimated to release CNY500 bn of long-term liquidity into the system. This is in addition to net injections of CNY559 bn via the 1Y medium-term lending facility (MLF) since the start of the year.”

“Banks have issued a record CNY6.71 tn of new loans in the first two months of the year (vs. CNY5.21 tn in the same period of 2022) and there may be concerns that the pace of credit expansion could ease sharply in the later part of the year.”

“The 1Y and 5Y loan prime rates (LPR) were unchanged at 3.65% and 4.30% respectively in Mar for the 7th straight month.”

“We now see the 1Y MLF rate to remain steady at 2.75% and consequently the 1Y LPR at 3.65%, for the rest of 2023. More important to watch will be the 5Y LPR as a reduction to the rate will signal stronger government support to the real estate sector. However, another RRR reduction later this year cannot be ruled out.”