It’s the MLF day in China – No rate cut expected from the People’s Bank of China

The People’s Bank of China set its Medium-term Lending Facility (MLF) rate on the 15th of each month.

The rate is currently 2.3%, after the PBoC lobbed in a surprise cut on the 25th of last month!

• People’s Bank of China reduces 1 year Medium-term Lending Facility (MLF) rate to 2.3%
• “PBOC surprises markets with an off-schedule 20bp cut to the MLF”

There are wide expectations of no change to the rate today.

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What is the MLF?

The PBOC’s MLF rate is a benchmark interest rate that banks in China can use to borrow funds from the People’s Bank of China for a period of 6 months to 1 year, as medium-term liquidity to commercial banks.

• The rate is typically announced on the 15th of each month.
• The interest rate on the MLF loans is typically higher than the benchmark lending rate (more on these below), which encourages banks to use the facility only when they face a shortage of funds.
• MLF loans are secured by collateral, which can be a wide range of assets including bonds, stocks, and other financial instruments. The collateral ensures that the PBOC can recover the funds if the borrower defaults on the loan.

The MLF rate sets the scene for the monthly Loan Prime Rate (LPR) setting, due on the 20th. Current LPR’s

• 1-year Loan Prime Rate 3.35%
• 5-year Loan Prime Rate 3.85%

The Bank cut both prime rates last month:

• China cuts 1 and 5 year loan prime rates by 10 basis points each

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