China's surprise decision to lower the reserve requirements for its banks last week is leading some market analysts to speculate that a cut in country's benchmark loan prime rate may be next, possibly as early as next week.
The People's Bank of China announced the cut in the amount of cash that banks must hold as reserves on Friday, releasing around 1 trillion yuan , more than expected. It is effective from July 15.
"If the LPR is lowered this month, the possibility of a subsequent cut in the medium-term lending facility rate will be smaller. If the LPR is unchanged following the RRR cut this month, the MLF rate is likely to be lowered in the future to guide the reduction of LPR." "Should the PBOC cut the MLF rate or LPR rate later in the month, it could open the door to a further rates rally. However, with our base case for no change in policy rate levels, we think the likelihood for a significant rates rally from current levels is not high and prefer to receive on bounces.""There are a few points to note on the PBOC-Fed policy divergence. First, the Fed is likely to taper by end-2021/early 2022, whereas the PBoC has already eased.
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