LPR’s Expected To Fix At Unchanged Levels

The 1-Year LPR is expected to fix at unchanged levels (3.70%) later today, with none of the 19 surveyed by BBG looking for a tweak. The 5-Year LPR is also expected to fix at unchanged levels (4.45%), with 12 of the 14 surveyed by BBG looking for no change, while one looks for a 5bp cut and the other looks for a 10bp cut.

• Note that concerns surrounding excessive stimulus are expected to limit PBoC easing in the immediate future, with the Bank looking to guide deposit rates lower to make it possible for banks to offer lower cost loans, per comments from policy advisors and market analysts in discussions with MNI (the weighted average new deposit rate fell to 2.32% in June, 12bp below the level observed in April). Those same discussions suggested that there is limited room for the PBoC to cut its major policy rates after the real weighted-average loan rate of companies dropped to a record low at 4.16% in June.
• A reminder that the DR007 rate trades comfortably below the PBoC 7-day reverse repo rate at present (to the tune of nearly 60bp), with liquidity “more than reasonably ample” per recent PBoC communique.
• While policymakers remain cognisant of the need to support the ailing property market, a further cut in the 5-Year LPR (after a surprise 15bp cut in May and the separate lowering of mortgage rates for first-time home buyers) is unlikely to be forthcoming at this time, given the worries surrounding loan quality in the space at present. This is owing to the well-documented non-payment of mortgage commitments by those awaiting the completion of various housing projects across different cities, with direct support for banks and potential mortgage grace periods seen as more viable options.
• Looking ahead, further policy easing is expected in the remainder of ’22, although this is expected to be targeted in nature, as policymakers look to avoid flood-like stimulus and support the faltering economy as it navigates the government’s dynamic zero COVID strategy, headwinds surrounding the property sector and spill over from wider recessionary worries in the U.S. & Europe.