Analysis predicts low chances of interest rate cuts before end of year

The People's Bank of China (PBOC) has maintained the Loan Prime Rate (LPR) for the second consecutive month, with the one-year rate remaining at 3.10% and the five-year rate at 3.60%.

Analysts note that the significant reduction in the LPR in October, combined with banks currently experiencing a historically low net interest margin, has removed any incentive to lower the LPR at this time further.

OCBC's Hong Kong economist believes that the likelihood of a rate cut in Mainland China before the end of the year is low. There is a potential for a 40 basis point reduction in the Loan Prime Rate (LPR) from now until the end of next year, although the timing remains uncertain. This outlook considers the current level of banks' net interest margins and the expectation for fiscal and monetary policies to work together for a synergistic effect, suggesting that both policy areas would need to align before a rate cut occurs.

OCBC's Hong Kong economist anticipates a possible reserve requirement ratio (RRR) cut of 25 basis points before year-end, driven by the maturity of large-scale Medium-Term Lending Facility (MLF) loans and increased liquidity needs around the Lunar New Year. She also sees a total of 75 basis points of RRR reduction space next year.

OCBC's Hong Kong economist further noted that with Donald Trump assuming the U.S. presidency next month and likely introducing various economic measures, the Federal Reserve's approach to rate cuts will be cautious. This, combined with a moderate easing of monetary policy in Mainland China, could widen the interest rate differential, putting depreciation pressure on the Renminbi. Jiang forecasts that the offshore Renminbi could reach 7.33 against the U.S. dollar by the end of next year.

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