MNI PBOC WATCH: Hefty 5Y LPR Cut Aimed At Mortgage Support

China’s bigger-than-expected cut to the Loan Prime Rate’s five-year plus tenor has sent a strong signal of support to the property market and will make further central bank easing more likely should the economy continue to soften and the U.S. Federal Reserve turnsdovish.

According to a People's Bank of China statement on Tuesday, the five-year plus LPR maturity, based on the PBOC’s Medium-term Lending Facility rate and quotes submitted by 20 banks, was reduced 25 basis points to 3.95% from 4.2%, its biggest cut yet, while one-year LPR remained unchanged at 3.45%. Investors had anticipated a 5-10bp cut. (See MNI PBOC WATCH: LPR Cuts Possible Despite Steady MLF)

The five-year plus LPR acts as the pricing benchmark for mortgages and mid- to long-term corporate loans. The hefty reduction will drive house buying and investment, while the unchanged one-year tenor will stabilise banks’ net interest margin, which has fallen to historical lows.

MORTGAGE SUPPORT

According to the PBOC’s data, the medium and long-term household loan sector, dominated by mortgages, increased by CNY404 billion last month, compared to the same period in 2023 – indicating the property sector may soon start to warm. Short-term household loans also jumped to a five-year high, illustrating a possible consumption recovery.

However, the Bank noted in its latest Monetary Policy Report published on Feb 8 that it expected property sector credit demand to reduce in the long run, slowing the wider expansion of credit.

According to National Bureau of Statistic, commercial residential property transactions in the 30 major cities declined by 7% y/y in January despite the significant low base – the same metric decreased 40% y/y over the same period in 2023. A survey by domestic real-estate data provider the China Index Academy showed similar poor new house sale performance during the week-long Chinese New Year holiday. The continued real-estate decline illustrates the ineffectiveness of recent stimulus measures.

DEFLATIONARY PRESSURE

Meanwhile, deflationary pressure has increased. CPI has declined for four consecutive months, while the Producer Price Index has also underperformed. The PBOC’s reduction of policy rates, such as the MLF and 7-day repo, has become increasingly necessary as the low inflation has pushed up real interest rates. (See MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024) Any further MLF reduction will add future downward pressure to the LPR.

The yuan could also strengthen should the Fed turn dovish, which will give the PBOC more room to adjust its policy rates.

The PBOC publishes its MLF rate on the 15th of every month.