The PBoC left the loan prime rates (LPR) unchanged on December 20, as expected. The one-year LPR remained steady at 4.15%, while the five-year LPR stayed at 4.80%. The last cuts were in November, when both rates were lowered by 5bps each to their current levels.
While the PBoC has eased monetary policy slightly in recent months to support the slowing economy—including a surprise 14-day reverse repo rate cut from 2.70% to 2.65% on 18 December, it has refrained from aggressive loosening for fears of fuelling financial risks and to stem rising debts.
Following latest strong industrial production and retail data for November, which signalled some stabilization of activity at home, there is now less pressure for bigger rate cuts in our view. The signing of the phase-one trade deal with the U.S., meanwhile, may help to relieve some pressures on the exports front with the December tariffs called off. More relief can be expected going into 2020 particularly if existing tariffs were also rolled back. We watch for the details of the phase 1 trade deal, due in January.
Should growth slow more than expected or if U.S./China relations take a turn for the worse again next year (which is not our base case), the Central Bank still has some leeway for monetary fine-tuning including lower reserve requirement ratios and open market operations.
Further rate cuts will likely remain small as sizable reductions may also fuel property speculation, raise inflationary expectations and affect banks’ profitability.