China likely to keep lending rates steady after May cut, trade truce

SHANGHAI (Reuters) -China is widely expected to keep its benchmark lending rates unchanged at a monthly fixing on Friday, a Reuters survey showed, after Beijing rolled out sweeping monetary easing measures a month earlier to aid the economy.

A framework agreement covering tariff rates between Washington and Beijing has raised optimism the world's two largest economies can get business activity back on track, reducing the urgency for additional easing measures.

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).

In a Reuters survey of 20 market watchers conducted this week, all respondents expected both the one-year and five-year LPRs to remain steady.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

Last month, China lowered LPRs for the first time since October, while major state banks lowered deposit rates as authorities cut borrowing costs to help buffer the economy from the impact of the Sino-U.S. trade war.

Market participants said key rates now move in tandem with the seven-day reverse repo rate, which serves as the main policy rate.

"That means any adjustment to the LPR should follow changes to the seven-day reverse repo rate," said a trader at a brokerage, noting it will also take some time to gauge the impact of stimulus measures introduced in May.

However, a string of disappointing economic data, including slower-than-expected credit growth and deepening deflationary pressure, has underscored the need for more stimulus.

"Near-term economic stabilisation is dependent on reaching a trade deal with the U.S., which will take precedence over more policy stimulus," said Ho Woei Chen, economist at UOB.

Chen expects the seven-day reverse repo rate to be reduced by 10 basis points in the fourth quarter of this year and guide LPRs to lower by the same margin.

"The prospect of another 50-basis-point cut to the reserve requirement ratio (RRR) remains in place," she said.

(Reporting by Shanghai Newsroom; Editing by Jacqueline Wong)