China is expected to leave interest rates unchanged today – how long until they cut?

The PBOC is expeted to hold its benchmark one and five year Loan Prime Rate (LPR) unchanged today.

Current LPR rates are:

• 3.45% for the one year
• 3.95% for the five year

The expected hold is despite subdued economic data and widespread expectations that the Bank will be forced to cut rates at some stage. A critical constraint on the PBOC cutting rates is the wide yield gap with the US and the pressure on the yuan this is entailing.

On Monday the Bank set the Medium-term Lending Facility (MLF) unchanged:

• People’s Bank of China set MLF rate at 2.5% (expected 2.5%, prior 2.5%)

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How are Loan Prime Rates set?

• These are an interest rate benchmark used in China, set by the People’s Bank of China each month on the 20th.
• The LPR serves as a reference rate for banks when they determine the interest rates for (primarily new) loans issued to their customers.
• Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
• Its calculated based on the interest rates that a panel of 20 selected commercial banks in China submit daily to the PBOC.
  • The panel consists of both domestic and foreign banks, with different weights assigned to each bank’s contributions based on their size and importance in the Chinese financial system.
  • The LPR is based on the average rates submitted by these panel banks, with the highest and lowest rates excluded to reduce volatility and manipulation. The remaining rates are then ranked, and the median rate becomes the LPR.

This article was written by Eamonn Sheridan at www.forexlive.com.