PBoC stands pat on interest rates, as expected

The People's Bank of China maintained its benchmark lending rates on Thursday, consistent with expectations and its recent decision to hold policy rates earlier in the month.

In its announcement, the central bank said it was holding the one-year loan prime rate at 3.55%, while the five-year loan prime rate remained at 4.2%.

The rates, calculated monthly, reflect the interest that 18 specifically selected commercial banks impose on their most credible clients.

Thursday's decision was no surprise to markets, considering that the PBoC also kept its pivotal policy rate - the interest rates of the medium-term lending facility, a primary reference for pricing loan prime rates - unchanged at the beginning of the week.

“Policymakers are still gauging the effect of last month’s broad 10 basis point lending rate cuts,” said Duncan Wrigley at Pantheon Macroeconomics.

“Both household and corporate net new loans were robust in June, after the lending rate cuts, but the economic impact looks modest, so far.”

Wrigley noted that manufacturing and infrastructure fixed asset investment ticked up in June, though private sector investment cooled.

“This probably means that state-owned enterprises and local government financing vehicles drove the increase in corporate loans.”

In a separate announcement on Thursday, the PBoC also announced modifications to regulations allowing firms to increase their borrowing from international sources.

The bank elevated its macro-prudential parameter for corporate and financial institutions' overseas financing from 1.25 to 1.5, coming into effect immediately.

“The mid-year Politburo meeting, likely to take place next week, will review the first-half economic situation and set out the policy direction for the second half,” Duncan Wrigley added.

“China’s recovery is stalling, but we do not sense any panic; the services sector is still growing, just at a slower rate, while the industrial sector is cooling.

“We think policymakers will supplement the lending rate cuts with targeted fiscal, quasi-fiscal and targeted monetary policy support.”

Reporting by Josh White for Sharecast.com.