China pauses rate cuts

China one-year loan prime rate was maintained at 3.45% while the five-year LPR was retained at 4.2%.

By Ahmed Azzam | @3zzamous | 20 November 2023

  • PBoC takes a breather, keeping its current monetary stance unchanged

  • Dollar index hits 11-week low at 103.6 on easing US inflation concerns

  • Investors await FOMC minutes and US data

China's PBoC holds firm on lending rates

The People's Bank of China (PBoC) adhered to its established course by maintaining lending rates at the November fixing, a move widely anticipated by market participants. The one-year loan prime rate (LPR), a key gauge for medium-term lending utilized in corporate and household loans, remained at a historic low of 3.45%. Simultaneously, the five-year rate, a benchmark for mortgages, held steady at 4.2% for the fifth consecutive month. This decision, announced on Monday, followed the central bank's recent decision to keep medium-term interbank rates unchanged. The economic landscape in October exhibited a mixed picture, with challenges persisting in the property sector despite a series of stimulus measures from authorities.

In the backdrop of these economic dynamics, the PBoC faces constraints on monetary easing due to the ongoing depreciation of the yuan. China stands out among central banks as it endeavors to loosen monetary policy to bolster its economy. However, further rate cuts could widen the yield gap with the United States, posing the risk of yuan depreciation and capital outflows. Some economists anticipate a 20 basis points reduction in the lending benchmark by the end of Q1 2024.

Dollar index hits 11-week low as Fed signals potential shift in monetary policy

On another front, the dollar index saw a decline to approximately 103.6 on Monday, marking its lowest levels in 11 weeks. This dip was attributed to diminishing concerns about US inflation, reinforcing expectations that the Federal Reserve has concluded its tightening cycle. Traders are now redirecting their attention to potential interest rate cuts in the coming year. The consensus is that the central bank will likely maintain rates in December, with a 30% market expectation that rate cuts could commence as early as March 2024.

Investors are eagerly awaiting insights from the latest Federal Open Market Committee (FOMC) minutes and a slew of upcoming economic data in the United States to navigate future developments. Concurrently, China's central bank's decision to leave the one and five-year loan prime rates unaltered at 3.45% and 4.2%, respectively, aligns with prevailing market expectations.