China has made a small but significant trim to a key interest rate ahead of the release of the October economic data starting on Friday.
The People’s Bank of China (PBoC) on Tuesday moved to push down borrowing costs for business by trimming its medium-term lending facility (MLF) for the first time since early 2016.
The cut was only 5 basis points to 3.25% and came after a trim to a couple of other rates, but also seven reduction in bank reserve asset ratios in the past 20 months.
“This is the first MLF rate cut since the facility was introduced in 2016. It is also the first cut in over three years to the rates on any of the PBOC’s lending facilities,” Capital Economics’ senior China economist Julian Evans-Pritchard said in a note to clients on Tuesday afternoon.
Chinese banks use the MLF to price new loans via the central bank’s one-year lending benchmark, the Loan Prime Rate (LPR).
Tuesday’s small reduction will now allow banks to offer lower interest rates to new borrowers, potentially supporting economic activity through increased demand for credit.
It is notable that credit for car purchases has become tougher leading to falling car sales now for more than a year. Economists in China say however that has been due more to government pressure than tougher bank standards.
Curbing car sales, especially in major urban areas is one way of trying to control smog and pollution, and pressuring US and European carmakers during the current trade war with Donald Trump.
“The reduction in the MLF rate should directly feed through to a lower LPR,” Mr. Evans-Pritchard said. “The latest…cut will lower funding costs for banks and, as a result, banks should be more willing to lower lending rates.”
The next LPR reset – set by quotes provided by banks as a spread to the MLF rate – is scheduled to occur on November 20.
Mr. Evans-Pritchard is sceptical it will boost credit demand or the broader economy.
“A five basis point decline in the MLF rate and LPR won’t be enough to drive a turnaround in credit growth, which has started slowing again recently,” he said. “With economic activity likely to come under further pressure in the months ahead, we think more easing will be needed to prevent growth from slowing too sharply.”
Chinese trade data for October is out on Friday and inflation figures on Saturday.
