MNI PBOC WATCH: Banks’ Narrow Margins Restrain LPR Cut

China’s commercial banks’ squeezed interest margins helped hold the loan prime rate (LPR) steady in September, however, the People’s Bank of China will likely cut its policy rates to guide down the reference lending rate by 5-10bp later this year to bolster the slowing economy, economists and analysts told MNI.

The LPR, based on the rate on the PBOC’s medium-term lending facility (MLF) and quotes submitted by 18 banks, remained at 3.45% for the one-year maturity and 4.2% for the over-five-year tenor on Wednesday in line with expectations. (See:MNI PBOC WATCH: China To Keep LPR Steady, Q4 Rate Cut Eyed)

Lenders were reluctant to lower their LPR quotes due to reduced interest income after the PBOC pushed interest rates on existing mortgages for the first homebuyers lower, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. Wang added rising funding costs due to faster credit expansion and higher wholesale prices had further pressured interest margins.

Average interest margins dropped to 1.8% in H1, a record low, according to reports by 58 A-share listed banks.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, predicted the interest rate on outstanding mortgages would fall by an average of 80bp and affect 40 million households.

A reduction to the five-year LPR will become less necessary thanks to mortgage rate cuts, he said. However, a 5-10bp cut in Q4 remains possible, particularly for the five-year rate, as authorities would want to lower medium and long-term company lending costs and boost consumption, he added.

ECONOMY PRIORITISED

Some economists are concerned the PBOC may restrain its easing pace as the yuan continues to weaken. The central bank noted Wednesday it will strike a balance between boosting the domestic economy and maintaining yuan stability, and will take prompt action to curb any overshoot of the exchange rate.(See:MNI BRIEF: PBOC Pledges To Curb Sharp Yuan Moves)

Wang said the regulators will lean on policy tools to maintain the currency’s stability and cut key MLF rates to stabilise economic growth and the property sector. Meanwhile, tepid inflation will also provide room for further easing, he said.

Dong agreed, noting the recent reserve requirement ratio cut had shown the PBOC’s commitment to domestic issues over the yuan.