China To Hold Lending Rates Constant

On May 22, China held its benchmark lending rates constant for the ninth month in a row, meeting market expectations, as a falling yuan and widening yield differentials with the US limited the possibility for any significant monetary easing.

A slew of data over the previous month or so, notably April indications released last week, indicated that the economy was losing steam following the initial post-COVID bounce, raising anticipation for additional relaxing measures.

However, given the risks of capital outflows, which could exacerbate the yuan's slide, some analysts now expect the People's Bank of China (PBOC) to reduce the amount of cash banks must hold aside as its next policy action.

Earlier in the day, China's one-year loan prime rate (LPR) remained steady at 3.65%, while its five-year LPR remained unaltered at 4.30%.

"Despite the April weakness, we do not expect policymakers to unleash significant stimulus because the 5% GDP growth target remains well within reach and issues such as property risks and youth unemployment require a more targeted approach," Goldman Sachs economists wrote in a note.

"Within monetary policy, symbolic measures such as a reserve requirement ratio (RRR) cut are more likely this year than policy rate cuts given the already wide US-China interest rate differential and RMB depreciation pressure."

"This is most likely achievable without policy rate cuts, which we believe the PBOC will avoid. “They said.

"The disadvantage of lowering the LPR is that it reduces banks' return on existing loan book, putting pressure on net interest margins, which are already at a record low."