MNI PBOC WATCH: China Seen To Cut 5-Year LPR To Lift Property

China's key reference lending rate for loans of over five years is expected to be cut to help lower mortgage rates as the government steps up efforts to support the ailing property market.

The Loan Prime Rate, which is based on the People’s Bank of China’s Medium-term Lending Facility (MLF) rate and quotes submitted by 18 banks, remained at 3.65% for the one-year maturity and 4.3% for over-five-years on Thursday, which was in line with market expectations. (See MNI PBOC WATCH: China LPR To Remain Steady As Congress Meets)

The over-5-year LPR, which is a reference rate for mortgages, was likely to be reduced by 10-15bps this year even if the rate on the MLF remained steady, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating.

“In order to push mortgage interest rates down, the over-five-year LPR needs to be down,” said Wang, adding that mortgage rates needed to be even lower for first-home buyers.

The 1-year LPR is unlikely to be cut given the chances of a lower MLF rate are limited since the recovery in credit demand and the fall in the yuan against the U.S. dollar.

The widened interest spread between China and the U.S has pressured the yuan and moderately restrained the PBOC’s easing pace, said China Minsheng Bank chief economist Wen Bin.

September data indicated both credit demand and long-term loans had improved, undermining the need for an MLF cut, he said.

There is still a chance the reserve requirement ratio may be reduced this year.

The issuance of additional special local government bonds could prompt a RRR cut to free up capital for banks, said CITIC Securities chief economist Ming Ming.