MNI PBOC WATCH: Sept LPR To Hold As Fiscal Efforts Prioritised

China’s Loan Prime Rate is likely to hold steady in September as authorities emphasise fiscal expansion amid soft bank loan demand, and continue to more closely coordinate fiscal and monetary policy.

The one-year LPR is expected to hold at 3.0% and the five-year tenor at 3.5% on Sunday for the 16th consecutive month. Both rates were last lowered by 10 basis points in May 2025 after the People’s Bank of China cut the seven-day reverse repo rate and reserve requirement ratio.

Liu Shangxi, vice president of the China Society of Macroeconomics, told MNI fiscal and monetary policy coordination is needed to improve policy transmission efficiency, particularly amid strong supply and weak demand. Interest subsidies and financing guarantees can ease constraints on corporate borrowing caused by debt pressures and weak profitability, he said, noting bank lending becomes more difficult as debt accumulates and real interest rates remain elevated. (See MNI: China To Deepen Fiscal-Monetary Coordination, Eye Credit)

The Ministry of Finance and PBOC recently announced plans to optimise the existing CNY100 billion fiscal-financial coordination fund, expanding the scope of interest subsidies to include working-capital loans to small and medium-sized enterprises and credit-card use. Authorities also raised the ceiling for SME loan interest subsidies.

POLICY COORDINATION

Yuan Haixia, director of the Research Institute at China Chengxin International Credit Rating, said fiscal-financial coordination is likely to focus on three main instruments, including interest subsidies to lower short-term financing costs, guarantees and risk compensation to support technology innovation and SMEs facing high risk premiums, and government investment funds, policy-based finance and REITs to provide long-term capital to sectors driving new productive growth.

If policy impacts fall short, authorities could expand the scope of interest subsidies, raise quotas or extend subsidy durations, she said. Authorities could also expand guarantee programmes for private investment and risk-sharing schemes for private corporate bonds. (See MNI INTERVIEW 2: China's Econ Restructure Needs More Support)

Advisors noted fiscal authorities will expand support by providing guarantees and interest subsidies for corporate bond issuance of technology companies and enterprises involved in the "six networks," including electricity, computing infrastructure and railways. Since 2025, fiscal authorities and the PBOC have jointly subsidised technology-innovation bond issuance to lower financing costs for high-tech firms.

WEAK CREDIT

PBOC Governor Pan Gongsheng revealed in an article published in Qiushi Journal on Wednesday the end to China's rapid monetary expansion, adding slower bank loan growth will become the new normal as the economy shifts its focus to high-quality growth represented by high-tech companies.

Warning of the fast rise in the leverage ratio over the past few years, he downplayed the role of loan expansion as a key indicator to assess policy effectiveness.

Pan’s comments followed August data that showed unexpected weakness in bank loan growth, with household loans contracting for a second consecutive month and corporate loan growth at its lowest level since 2016.

Meanwhile, from January to August, the combined new issuance of corporate bonds, non-financial corporate equities, and government bonds accounted for 50.3% of new total social financing, exceeding the share of loans for the first time.

RPT-MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

(Repeats story first published on Sept 16)

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI FED WATCH: Fed Leans Toward Another Rate Hike This Year

Federal Reserve officials look inclined to raise interest rates once more this year and potentially another time early next year, according to new dot plot projections that suggest Wednesday's interest rate hike was the start of a limited tightening cycle. 

Fed Chairman Kevin Warsh declined to discuss whether the increase in the federal funds rate to 3.75%-4% was the first of a series of moves, in keeping with his desire to offer less guidance. But he said underlying inflation is too high and the geopolitical situation has changed, hinting conditions are not yet tight enough to bring inflation back to target in a timely manner.

The SEP clearly showed policymakers hawkishly leaning into a higher for longer posture, with the median showing one more hike for 2026 and eight officials penciling in another rise in 2027. For a second time in a row, Warsh did not submit dots for the SEP. 

"The plain fact is that inflation is too high and has been for too long,” Warsh said during the news conference. "Inflation risks are to the upside, while labor risks are roughly balanced."

He said the FOMC's standard of having confidence that underlying inflation is moving back to target in timely manner has not been met, adding too many categories in the inflation basket are still rising above 3%.

"We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives," he said.  

Equities sank and Treasury yields jumped after the central bank meeting. Futures see a 50% chance the Fed increases rates at its next meeting in October. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75BP Higher-Lewis)

HIGHER FOR LONGER

Warsh demurred from any questions related to President Donald Trump, who has made clear his desire for lower rates. Just days before the meeting, Trump threatened to cut off broad swathes of trade if the Fed did not cut rates. Trump demanded lower interest rates to 1% after the FOMC meeting.

The Fed Chairman said three factors influenced the FOMC's decision to raise interest rates on Wednesday. One, wide-ranging data suggesting a strong economy. Second, summer inflation trends that "weren't passing the test." Lastly, the FOMC assessment that the geopolitical situation has changed. 

"All three of those things helped themselves to a firm, unanimous decision today," Warsh said. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis) 

The median FOMC official saw rates coming down in 2028 to 3.9% and in 2029 to 3.6%. Inflation isn't expected to reach the central bank's 2% target until 2029. 

"Today's action starts to show we are serious about this. And we will deliver on the price stability objective, and as the statement said, we will do it on a timelier basis," he said. 

Long-end Treasury yields have risen recently for three reasons including economic strength, competition for capital, and geopolitics, Warsh said, in a shorter press conference lasting less than 30 minutes. 

RPT-MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

(Repeats story to add title)

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI BOE WATCH: Markets Rates Pricing A Comms Challenge For BOE

The Bank of England is expected to hold rates again on Sept 17, likely in a repeat of July’s six-three vote, and to cut the pace of quantitative tightening.

Market pricing for a hike this week has come off, with only two basis points priced in after implying up to a 30% chance of a hike earlier this week as the conflict in the Middle East intensified. Investors will focus on any hints as to the BOE’s future moves, with over 100 basis points of increases priced in by July, including a hike at the next meeting in November. This pricing contrasts with far less aggressive comments by Monetary Policy Committee members, posing a challenge for the Bank’s communications strategy on Thursday.

Last week Deputy Governor Ramsden told the Treasury select committee that "the market curve is significantly above where it was expected to be before the conflict," while MPC member Alan Taylor reiterated that he viewed the Bank's hold since December as an "active decision to maintain the restrictiveness." 

Markets rates pricing picked up after the March meeting, when the Bank’s language was taken hawkishly. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

Chief Economist Huw Pill, Megan Greene, and Catherine Mann voted for a hike in July, and are likely to do the same this week. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

Some members who have voted for a hold so far, including Governor Andrew Bailey and Deputy Governor Clare Lombardelli, have said they are watching for evidence of second-round effects before considering a hike. 

But, though recent GDP data has been above expectations, there is little clear evidence of additional wage pressures feeding through from higher energy costs. Ramsden told the TSC that "our preferred measure, private sector regular wages, came in at 2.8%," compared to 3.2% expected before the conflict, as vacancies have fallen. (see MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

QUANTITATIVE TIGHTENING

The MPC will also vote to on the pace of further quantitative tightening, as gilt yields reached multi-decade highs after last week's news from the Middle East.

The July Monetary Policy Report included a box revising the estimate of the impact of QT since 2022 10-year yields to 20-30bps, while emphasising that the Bank's active sales have had "little impact on market functioning." (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)

Still, as the Bank approaches its equilibrium level of reserves, it is expected to slow the pace of QT to GBP50 billion per year, and reports in the Telegraph suggest it will cease its active sales of long-dated gilts. (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)

The Bank's next decision will come alongside an MPR on Nov 5, after the Oct 28 budget.

MNI BOE WATCH: Markets Rates Pricing A Comms Challenge For BOE

The Bank of England is expected to hold rates again on Sept 17, likely in a repeat of July’s six-three vote, and to cut the pace of quantitative tightening.

Market pricing for a hike this week has come off, with only two basis points priced in after implying up to a 30% chance of a hike earlier this week as the conflict in the Middle East intensified. Investors will focus on any hints as to the BOE’s future moves, with over 100 basis points of increases priced in by July, including a hike at the next meeting in November. This pricing contrasts with far less aggressive comments by Monetary Policy Committee members, posing a challenge for the Bank’s communications strategy on Thursday.

Last week Deputy Governor Ramsden told the Treasury select committee that "the market curve is significantly above where it was expected to be before the conflict," while MPC member Alan Taylor reiterated that he viewed the Bank's hold since December as an "active decision to maintain the restrictiveness." 

Markets rates pricing picked up after the March meeting, when the Bank’s language was taken hawkishly. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

Chief Economist Huw Pill, Megan Greene, and Catherine Mann voted for a hike in July, and are likely to do the same this week. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

Some members who have voted for a hold so far, including Governor Andrew Bailey and Deputy Governor Clare Lombardelli, have said they are watching for evidence of second-round effects before considering a hike. 

But, though recent GDP data has been above expectations, there is little clear evidence of additional wage pressures feeding through from higher energy costs. Ramsden told the TSC that "our preferred measure, private sector regular wages, came in at 2.8%," compared to 3.2% expected before the conflict, as vacancies have fallen. (see MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

QUANTITATIVE TIGHTENING

The MPC will also vote to on the pace of further quantitative tightening, as gilt yields reached multi-decade highs after last week's news from the Middle East.

The July Monetary Policy Report included a box revising the estimate of the impact of QT since 2022 10-year yields to 20-30bps, while emphasising that the Bank's active sales have had "little impact on market functioning." (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)

Still, as the Bank approaches its equilibrium level of reserves, it is expected to slow the pace of QT to GBP50 billion per year, and reports in the Telegraph suggest it will cease its active sales of long-dated gilts. (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)

The Bank's next decision will come alongside an MPR on Nov 5, after the Oct 28 budget.