MNI PBOC WATCH: 5-Year LPR Cut Seen To Boost Property Recovery

China’s over-five-year loan prime rate is still expected to be reduced later this quarter to support the housing market after key lending reference rates were left unchanged on Friday as confidence in an economic recovery spurs loan demand, economists said.

The loan prime rate (LPR), based on the rate on the People’s Bank of China’s medium-term lending facility (MLF) and quotes submitted by 18 banks, remained at 3.65% for the one-year maturity and 4.3% for the over-five-year maturity on Friday, according to the PBOC’s website. This was in line with expectations and marked the sixth consecutive month the key rate was held steady. (See MNI PBOC WATCH: LPR ON Hold, But Ample Tools To Boost Growth)

Lenders are reluctant to lower their quotes for the LPR given rising funding costs as confidence in a recovery gains traction and as loan growth quickens in January, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. Time is needed to gauge the effect of policies to support the property market, particularly the implementation of lower mortgage rate floors in qualified cities, he said.

Interest rate margins are being squeezed given outstanding loan were repriced at the beginning of the year based on a lower LPR, while new loans are being approved at lower rates. Additionally, banks are increasingly supporting the real economy and writing off bad loans, which is pressuring profits.

Wang said a further reduction in mortgage rates was needed to ensure a soft landing in the real estate market, which would require the over-five-year LPR to be lowered. He predicts a 10bp cut would be made in the next two months. (See MNI INTERVIEW: China Should Grow 5% But Property A Drag - Hofman)

China Minsheng Banking Corp chief economist Wen Bin said policy rates, including those on the PBOC’s open market operations (OMOs) as well as the MLF, would be cut by 5bps to 10bps around the “two sessions”, which commence on March 3 and March 5. This would help guide down the LPR, offset the hit to growth from the wave of Covid infections, and ensure economic stability.

RRR CUT

A cut in the reserve requirement ratio is expected in April after policy rates cut in the first quarter, depending on the strength of credit expansion and the recovery in consumption, he predicted.

Even though the People’s Bank of China did not lower the rate on the MLF this month, which disappointed the market, it highlighted its easing stance via a significant liquidity injection to fill the liquidity gap before Chinese New Year and shore up credit.

The Bank injected a net CNY2 trillion through its OMOs in the last working week before Chinese New Year, a record weekly net injection, with economists estimating that would support a surge in new loans in January.