China Freezes MLF... RRR Likely to Be Lowered (Summary)

Published 15 Apr.2022 12:39(KST)

Possibility of LPR Rate Cut Following GDP Results on the 18th

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank of China, has kept the interest rate on the one-year Medium-term Lending Facility (MLF) loan unchanged.

[Image source=Yonhap News]

The People's Bank of China announced on the 15th that it supplied 150 billion yuan worth of one-year MLF funds to commercial banks while maintaining the applied interest rate at 2.85%, the same as before.

Accordingly, the monetary policy tools available to Chinese financial authorities remain the reserve requirement ratio (RRR) and the loan prime rate (LPR).

Chinese Premier Li Keqiang mentioned the RRR during the State Council executive meeting held on the 13th, instructing to prepare measures to expand financial support for stabilizing the real economy.

It is widely expected that the People's Bank of China will cut the RRR rate this afternoon. The RRR is the cash ratio that commercial banks must deposit with the central bank. Typically, a 0.5% cut creates an additional lending capacity of 1.2 trillion yuan (approximately 231 trillion won).

A cut in the LPR, which serves as the benchmark interest rate, is also possible. The People's Bank of China will decide the LPR rate on the 20th.

Depending on the first-quarter results of China's gross domestic product (GDP) scheduled for the 18th, there is a high possibility that the People's Bank of China will lower the LPR. However, abundant funds in the market due to the issuance of local special bonds in the first quarter and the U.S. interest rate hikes pose obstacles.

It is also possible that Chinese financial authorities will prioritize using the RRR tool among the three options first, and then use the MLF or LPR tools in May and June.