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

The PBoC has kept the 1-year MLF interest rate unchanged at 2.5%, as expected

Injects 100bn yuan via a one year MLF

• 170bn yuan come due on Wednesday
• net drain of 70bn yuan in MLF

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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 on the 20th 21st, because the regular 20th is a Sunday. Current LPR rates are:

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

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