People's Bank of China interest rate cut expected today

<p> The interest rate on the MLF loans currently stands at 2.5%. It was last cut in August 2023, from 2.65%.</p><p>Market expectations:</p><ul><li>the consensus estimate in the Bloomberg survey of analysts is that the People's Bank of China (PBOC) will cut 10bp off the MLF rate today.</li><li>Reuters poll shows 19 of 35 analysts expect the Bank to cut</li><li>779 billion yuan of MLF loans mature, the PBoC is expected to offset this and more (a larger than 779bn yuan injection via the new MLF)</li></ul><p> The announcement will be made at 0020 GMT, 1920 US Eastern time.</p><p>The most recent data to support expectations of a cut are the continued deflationary CPI and PPi:</p><ul><li><a href="https://www.forexlive.com/news/china-december-cpi-03-expected-04-20240112/" target="_blank" rel="follow" data-article-link="true">China December CPI -0.3% y/y (expected -0.4%)</a></li></ul><p>Mix in:</p><ul><li>protracted property crisis</li><li>cautious consumers and subsequent soft demand</li><li>geopolitical issues simmering</li></ul><p>Reuters cite analysts at Citi:</p><ul><li>"Inflation could be of higher priority for the PBOC to
prevent a negative feedback loop between deflation and
activities," </li><li>"We reiterate our view for a policy rate/LPR cut as early as
in coming weeks within January … We maintain our expectations
of 50-basis-point reserve requirement ratio (RRR) cuts and
20-basis-point MLF rate cuts for the whole year."
</li></ul><p>UBS:</p><ul><li>expects a total of 10 to 20 bps of rate reductions and
25 to 50 bps points of RRR cuts this year</li></ul><p>***</p><p>A rate cut from the PBoC should, at the margin, be a boost for the Chinese economy and thus for the China trade. AUD should be a beneficiary, but with the cut expected there may well not be too much upside scope on this.</p><p>The 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. That is, its a rate for the PBOC to provide medium-term liquidity to commercial banks.</p><ul><li>The rate is normally announced on the 15th of each month.</li><li>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.</li><li>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.</li></ul><p>The MLF rate sets the scene for the monthly Loan Prime Rate (LPR) setting on the 20th 22nd (the 20th is a Saturday). Current LPRs:</p><ul><li>3.45% for the one year</li><li>4.20% for the five year</li></ul>

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