SHANGHAI, June 19 - China is expected to hold benchmark lending rates steady on Thursday, a Reuters survey showed, even as expectations for an interest rate reduction grew this month following a flurry of weaker-than-expected economic data.
Analysts note that policymakers' ability to reduce lending rates will remain constrained by China's wide yield gap with developed countries, especially the United States, and the risk of further pressuring a fragile yuan currency.
The loan prime rate (LPR), normally charged to banks' best clients, is calculated each month after 20 designated commercial banks submit proposed rates to the People's Bank of China (PBOC).
The survey of 30 market watchers found 21, or 70% of all respondents, expect the one-year and five-year LPRs to stay unchanged. This was down from an 82% majority who picked a steady outcome in the LPR poll conducted last month.
Among the remaining nine respondents, seven predicted a steady one-year LPR but a reduction of 5 to 20-basis-point reduction to the five-year rate, while the other two forecast a 5 to 10-basis-point cut to both rates.
Expectations for the steady LPR fixings come as the PBOC kept the rate on one-year medium-term lending facility (MLF) loans unchanged earlier this week.
The MLF rate serves as a guide to the LPRs and markets mostly use the MLF rate as a precursor to any changes to the lending benchmarks.
"While the government has continued to ramp up fiscal stimulus, the PBOC kept the MLF rate on hold and we also expect it to leave LPR rates unchanged later this week," Leah Fahy, assistant economist at Capital Economics, said in a note this week.
"The renminbi has been under considerable pressure recently and rate cuts would drag on the currency further. Policymakers will be keen to avoid this, given the importance the government places on currency strength."
Financial News, a PBOC-backed newspaper, said in a commentary this week that China still has room to lower interest rates, but its ability to adjust monetary policy faces internal and external constraints, namely shrinking net interest margins at lenders and a weakening yuan.
"We expect no MLF rate cuts for the rest of 2024, but a 10-20-basis-point LPR cut is possible," said Wang Tao, chief China economist at UBS.
"If overall growth momentum disappoints and property activities further weaken, we expect more policy support measures to be rolled out, possibly around or after the July Politburo meeting."
China's new home prices fell at the fastest pace in more than 9-1/2 years in May, official data showed on Monday, with the property sector in a depressed state despite government efforts to rein in oversupply and support debt-laden developers.
Moreover, data released last Friday showed that new bank lending in China rebounded far less than expected in May and some key money gauges hit record lows, suggesting the world's second-largest economy is still struggling to pick up the recovery pace. (Reporting by Wu Fang and Winni Zhou in Shanghai, Tom Westbrook in Singapore Editing by Shri Navaratnam)