MNI PBOC WATCH: Five-Year LPR Cut An Option If Growth Falters

China’s reference lending rates are expected to remain steady over coming months as indicators of credit expansion and property activity highlight a recovery, though the over-five-year loan prime rate may need to be cut if the economic rebound proves unsustainable, economists and analysts 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 Monday, according to the PBOC’s website. This was in line with expectations and marked the seventh consecutive month the key rate was held steady. (See MNI PBOC WATCH: China’s LPR Seen Steady On Economic Recovery)

The steady LPR reflected an unchanged rate on the PBOC’s MLF this month, while rising funding costs in the wholesale market due to a liquidity shortage since the beginning of February also curbed the ability of lenders to lower their quotes for the LPR, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. He pointed out that the 7-day reserve repo rate in the interbank market had been higher than the PBOC’s policy rate over most of February.

The performance of property market will be a key factor in determining the need for additional LPR cuts, he said, adding the over-five-year LPR may be reduced by 10 to 15bps as early as next quarter to guide down mortgage rates. Wang said the PBOC will ensure corporate and consumer loan rates are kept low by avoiding a fast increase in wholesale market rates.

The latest data from the National Bureau of Statistics showed falling prices for both new and second-hand houses slowed in January, indicating property activity may be bottoming, fuelling speculation that a full rate cut may be on hold and awaiting further data.

Yin Ruizhe, analyst at China Merchants Securities, said the PBOC may move in the second half of year when the quarter-on-quarter recovery and year-on-year comparison base weakens.

China Minsheng Banking Corp chief economist Wen Bin said the need for a policy rate cut was falling as companies are increasing their borrowing, though there was a chance the rate on the MLF may be cut after China’s “two sessions” in March, when newly installed officials will gauge the strength of the property market to determine whether it has passed a turning point.

TARGETED EASING

Targeted easing, including targeted rate cuts, via structural monetary tools will be the PBOC’s preferred measure, and the LPR is unlikely to decline without a MLF rate reduction considering lenders’ high funding costs, Wen pointed out.

Amid the consensus that the PBOC is in a hold-and-wait stance, more attention is turning to a possible rate cut on outstanding mortgages, a move unseen since 2008 when the economy endured downward pressure. The debate has gathered steam as borrowers have rushed to repay mortgages as the rate on outstanding mortgages is much higher than on new home loans. (See MNI: China's Rebound At Risk From Balance Sheet Recession)

CITIC securities chief economist Ming Ming said a reduction of the outstanding mortgage rate would help lower the debt pressure on households and boost consumption. However, such as cut may be restrained by the squeeze on lenders’ net interest margins and the need for detailed policy design by the PBOC, which may stop the central bank from rushing to take action. But the possibility of the move should not be ruled out.