EXTERIOR trade tensions and interest rate reforms are fueling speculation China will start cutting key rates from next month, but bankers expect borrowing costs to come down only gradually, offering limited support for the slowing economy.

Analysts say landmark reforms launched last week have paved the way for the first cuts in major China policy rates in four years, with a move seen by mid-September, coinciding with expected easing by the U.S. Federal Reserve.

“The first step is to ensure a smooth transition. It’s fine if interest rate margins widen, but it could be troublesome if interest rate margins narrow,” said Lu Zhengwei, chief economist at Industrial Bank.

To reduce the pressure on banks, the central bank is expected to first reduce their funding costs by lowering the rate on its medium-term lending facility (MLF). That will open the door for a cut in the central bank’s new benchmark lending rate, the loan prime rate (LPR), the next time it is set Sept. 20.

The MLF forms the basis for the new LPR rate, but banks can add a premium to reflect funding costs and credit risks.

In what was seen as a symbolic move, the revamped one-year LPR was set at 4.25 percent last week, down 6 basis points (bps) from 4.31 percent previously and 10 bps lower than the existing benchmark one-year lending rate.(SD-Agencies)