Fear of D Hits China... Possibility of Base Rate Cut Tomorrow Weighs Heavy

China's central bank, the People's Bank of China, will decide on the loan prime rate (LPR), the de facto benchmark interest rate, on the 21st. Due to fears of deflation (falling prices) and the spread of corporate default risks in the real estate and financial sectors, there is growing weight on the possibility of an interest rate cut.

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The People's Bank of China cut the 1-year and 5-year LPR, which had been frozen since August last year, by 0.1 percentage points each in June, and kept them unchanged last month.

The market expects a high likelihood of a rate cut this month.

China's retail sales and industrial production in July increased by only 2.5% and 2.7% respectively compared to the same period last year, leading to assessments that both consumption and production have fallen into a slump.

On the 15th, the People's Bank of China lowered the short-term policy rates: the 7-day reverse repurchase (reverse repo) rate to 1.8%, and the 1-year Medium-term Lending Facility (MLF) rate to 2.5%, cutting them by 0.1 percentage points and 0.15 percentage points respectively.

MLF loans are liquidity adjustment tools where the central bank lends funds to commercial banks, and the MLF rate is also considered a gauge of the benchmark interest rate.

Attention is focused on the extent of the LPR cut.

Experts predict that the 1-year LPR will likely be cut by 0.1 to 0.15 percentage points, and the 5-year LPR by 0.15 to 0.25 percentage points.

Market economists surveyed by Bloomberg forecast that the 1-year and 5-year LPR will most likely be lowered by 0.15 percentage points each.

This content was produced with the assistance of AI translation services.