China expected to cut key policy rates and lending benchmarks: Reuters poll by Reuters

SHANGHAI (Reuters) – China is widely expected to cut its key policy and benchmark lending rates on Friday, a Reuters poll showed, after excessive interest rate cuts by the Federal Reserve removed some of the risks of sharp cuts of the yuan.

Monetary policy divergence and a loosening have been the key constraints limiting Beijing’s efforts to ease policy over the past few years.

But with the US central bank kicking off its monetary easing cycle with a half-percentage point cut this week, analysts and traders believe Beijing has more room to maneuver on monetary policy.

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 39 market watchers this week, 27 or 69 percent of all respondents expected both one-year and five-year LPRs to be cut.

Of the remaining 12 respondents, two predicted a reduction in only the five-year LPR, while the remaining 10 predicted no change to either rate.

And as the seven-day reverse repo rate became the central bank’s main policy interest, market participants expected the PBOC to reduce the cost of borrowing the short-term liquidity tool before cutting LPRs.

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.

Economic data for August, including indicators of credit and activity, surprised lower and increased the urgency to implement more stimulus measures to support the economy, market watchers said.

Weakened Chinese economic activity prompted global brokerages to cut their 2024 China growth forecasts below the government’s official target of about 5 percent.

President Xi Jinping last week urged authorities to push to meet the country’s annual economic and social development targets, state media reported, amid expectations that more steps are needed to shore up a sluggish economic recovery.