[ANALYSIS] PBoC LPRs cuts underwhelm, RBA Minutes refrain from signalling a July hike, while the June hike was "finely balanced"

Analysis details (06:45)

PBOC LPRs

• The PBoC lowered its Loan Prime Rates (LPRs) as expected, with the 1yr cut by 10 bps to 3.55% (exp. 3.55%, prev. 3.65%) while the 5yr was also lowered by 10bps, to 4.20% (exp. 4.15%, prev. 4.30%). 


• The 10bps cut to the PBoC's benchmark lending rate was unsurprising after the central bank recently delivered similar cuts to the 7-day reverse repo rate (13th June), standing lending facility rates and 1yr MLF (15th June) with the latter serving as a fairly accurate precursor for the PBoC’s intentions for benchmark lending rates. Some had expected a deeper 15bps cut to the 5yr LPR which most new mortgages are based on as press reports had previously noted that analysts anticipated the Loan Prime Rates to be cut in an asymmetrical manner with a 15bps cut in the 5-year Loan Prime Rate. 


• Analysts continue to flag China’s sluggish recovery from its zero-COVID-related hit, with several desks cutting their Chinese GDP forecast for 2023 – the latest names including Nomura, Goldman Sachs and Citi. Analysts at ING anticipate more cuts to follow, although in iterations, suggesting that “more will likely follow in the months ahead as the economy continues to struggle”. The Dutch bank reminds us China’s monetary policy framework differs from those of other major central banks – “The 7-day reverse repo rate and the 1Y MLF are set with a view to driving money market rates and credit/bond market rates. Loan prime rates are the rates on which mortgage yields are based. The standing lending facility rate (SLF) is equal to the 7-day repo rate plus 100bp, and is the cap for the interest rate corridor, while the 7-day reverse repo forms the floor. Deposit rates for savers are notionally set by banks but within ranges indicated by the PBoC - the so-called window guidance.”

RBA MINUTES

• The minutes from the June meeting stated that the Board considered a rate rise of 25bps or holding steady and reconsidering at a later meeting, while arguments were finely balanced, but Board decided the case for an immediate hike was stronger. The minutes did not signal that there will be a follow-up July hike. Market pricing after the release for a July rate increase fell to 42% from a pre-release level of around 58%. 


• In terms of some main points, the minutes suggested the case for the hike was focused on the increased risk that inflation would take longer to return to target than had been expected. The Board also reaffirmed its willingness to do what is necessary to bring inflation to the target. Furthermore, members noted that consumer spending had softened significantly, with both higher interest rates and high inflation weighing on household purchasing power. The release also highlighted that lags in the transmission of monetary policy meant the risk that past tightening could lead to a sharper economic slowdown. As a reminder, the RBA surprisingly raised the Cash Rate Target by 25bps to 4.10% (exp. 3.85%), while it reiterated that the Board remains resolute in its determination to return inflation to the target and some further tightening of monetary policy may be required. 


• Since the meeting, RBA Governor Lowe delivered a speech in which he said it is too early to declare victory in the battle against inflation and the June rate increase followed information suggesting greater upside risks to the bank's inflation outlook. The next meeting is slated for the 4th of July.

20 Jun 2023 - 06:45- Fixed IncomeData- Source: Newsquawk