SHANGHAI, Sept 20 (Reuters) - China cut its new one-year benchmark lending rate for the second month in a row on Friday, to 4.20%, as the central bank seeks to guide borrowing costs lower for an economy hit by the Sino-U.S. trade war.
The one-year LPR dipped to 4.20% at its monthly fixing on Friday, 5 bps lower than 4.25% in August. However, the five-year LPR was unchanged at 4.85%.
Friday’s was the second reduction in the one-year LPR, a lending reference rate set by 18 banks that the PBOC revamped last month, loosely pegging it to the rate on its medium-term lending facility (MLF). The MLF rate at 3.3% was last cut in early 2016.
Here are analysts’ comments on the rate cut:
“The size of the cut in 1-year LPR is limited. No cut in five-year LPR reflects the need to keep mortgage rates steady.
“I think they will definitely lower LPR further and they could cut the MLF rate. Some MLF loans will mature on Oct. 5. We also need to watch if the PBOC will cut the rate on TMLF (targeted medium-term lending facility).
“The Federal Reserve has cut interest rates twice, each by 25 basis points. So it would be appropriate if we cut rates by 25 bps. That will help stabilise market expectations, investment, consumption and will not put pressure on the exchange rate.”
“The move follows the 25 basis point rate cut by the U.S. Federal Reserve.
“The direct, and immediate impact on the economy will be limited given the small size of the cut but the cut has made it clear the Chinese authorities are taking an accommodative stance and should give reassurance to Chinese stock markets.”
“I believe that the decision comes from the fact that the August data, especially industrial production and fixed-asset investments, were very weak. The cut will guide interest rates lower in bank loans and other financial assets, especially the local government special bonds that are used to fund infrastructure projects.
“Infrastructure projects will face a lower interest cost. I think this is necessary, for now, as the trade war continues.
“I think it is not a growth-stimulation story, I think it is more a protection story, to not fall into a weaker growth range. Growth has been very weak and this is more for lowering interest costs for production and infrastructure.”
KIYOSHI ISHIGANE, CHIEF FUND MANAGER, AT MITSUBISHI UFJ KOKUSAI ASSET MANAGEMENT, TOKYO:
“The PBOC is experimenting with this new system. They are lowering rates very gradually and trying to measure the impact and see where the money flows as a result.
“Normally, a central bank would move in 25 basis point increments, but the PBOC is taking a very gradual approach because it wants to see how this will impact the financial system.
“The problem is even if the PBOC lowers rates, the money does not go to small- and medium-sized enterprises. For many banks, this lending is risky.”
KEN CHEUNG, CHIEF ASIAN FX STRATEGIST AT MIZUHO, HONG KONG:
“The PBoC’s easing package was somewhat disappointing to doves. The previously broad-based RRR cuts fueled expectation for PBoC’s bolder rate cut but it refrained from delivering a large easing package.
“Indeed, the status quo of Medium Lending Facility (MLF) yields and reverse repo yields earlier this week had pointed to limited magnitude for LPR cut.
“Without PBOC’s offer to lower funding costs, Chinese banks are reluctant to cut their LPR, which could squeeze interest rate margin and hurt their profitability. The status quo of 5Y LPR also reflected PBoC’s policy to curb the property prices rally as the longer tenor LPR links to the mortgage rate.” (Reporting by Hideyuki Sano, Stanley White, Noah Sin, Kevin Yao and Tom Westbrook; Editing by Richard Borsuk)