The interest rate on the MLF loans currently stands at 2.5%. It was last cut in August 2023, from 2.65%.

Market expectations:

  • the consensus estimate in the Bloomberg survey of analysts is that the People's Bank of China (PBOC) will cut 10bp off the MLF rate today.
  • Reuters poll shows 19 of 35 analysts expect the Bank to cut
  • 779 billion yuan of MLF loans mature, the PBoC is expected to offset this and more (a larger than 779bn yuan injection via the new MLF)

The announcement will be made at 0020 GMT, 1920 US Eastern time.

The most recent data to support expectations of a cut are the continued deflationary CPI and PPi:

Mix in:

  • protracted property crisis
  • cautious consumers and subsequent soft demand
  • geopolitical issues simmering

Reuters cite analysts at Citi:

  • "Inflation could be of higher priority for the PBOC to prevent a negative feedback loop between deflation and activities,"
  • "We reiterate our view for a policy rate/LPR cut as early as in coming weeks within January ... We maintain our expectations of 50-basis-point reserve requirement ratio (RRR) cuts and 20-basis-point MLF rate cuts for the whole year."

UBS:

  • expects a total of 10 to 20 bps of rate reductions and 25 to 50 bps points of RRR cuts this year

***

A rate cut from the PBoC should, at the margin, be a boost for the Chinese economy and thus for the China trade. AUD should be a beneficiary, but with the cut expected there may well not be too much upside scope on this.

pboc People's Bank of China 12 January 2024 2

The MLF rate is a benchmark interest rate that banks in China can use to borrow funds from the People's Bank of China for a period of 6 months to 1 year. That is, its a rate for the PBOC to provide medium-term liquidity to commercial banks.

  • The rate is normally announced on the 15th of each month.
  • The interest rate on the MLF loans is typically higher than the benchmark lending rate (more on these below), which encourages banks to use the facility only when they face a shortage of funds.
  • MLF loans are secured by collateral, which can be a wide range of assets including bonds, stocks, and other financial instruments. The collateral ensures that the PBOC can recover the funds if the borrower defaults on the loan.

The MLF rate sets the scene for the monthly Loan Prime Rate (LPR) setting on the 20th 22nd (the 20th is a Saturday). Current LPRs:

  • 3.45% for the one year
  • 4.20% for the five year