China widely expected to keep lending benchmark LPRs unchanged in August: Reuters poll by Reuters

SHANGHAI (Reuters) – China is expected to leave benchmark lending rates unchanged on Tuesday, a Reuters poll showed, after policymakers surprised global markets by cutting a number of key interest rates in July.

Shrinking interest margins at lenders remain the main constraint discouraging commercial banks from further cutting lending benchmarks, market watchers said, even as the general consensus is that the world’s second-largest economy needs more stimulus to sustain a recovery fragile.

The prime lending rate (LPR), normally charged to banks’ best customers, is calculated each month after 20 designated commercial banks submit proposed rates to the People’s Bank of China (PBOC).

In a Reuters poll of 37 market watchers this week, all respondents expected both one-year and five-year LPRs to remain unchanged.

China surprised markets by cutting key short- and long-term interest rates in July, its first broad move in nearly a year, signaling policymakers’ intent to bolster economic growth.

Both one-year and five-year LPRs were cut by 10 basis points in July to 3.35% and 3.85% respectively.

“China is tipped to keep its one-year and five-year LPR static tomorrow after last month’s surprise cuts,” analysts at OCBC Bank said in a note.

Official data showed that commercial banks’ net interest margins (NIMs) – a key indicator of profitability – fell to a record low of 1.54% at the end of March this year.

China’s bank lending also fell more than expected last month, hitting the lowest level in nearly 15 years, dragged down by warm credit demand and seasonal factors and raising expectations that the central bank may adopt more many relaxation measures.

Separately, traders and analysts said last month’s sequence of cuts showed the PBOC’s monetary framework has changed, shifting the short-term rate to be the main signal-guiding markets.

LPRs used to be loosely linked to the PBOC’s one-year Medium Term Lending Facility (MLF), and market participants typically saw changes in the MLF rate as a precursor to changes in the lending benchmark.

“The PBOC is moving faster than expected to a new monetary policy framework with a greater focus on the seven-day reverse repo rate,” said Carlos Casanova, senior Asia economist at UBP.

“This is an attempt to improve the transmission of rate cuts by focusing on money market rates and liquidity and is not expected to change the projected path of another rate cut in the fourth quarter of 2024.”