MNI PBOC WATCH: LPR Cut Seen Despite Rising Bank Funding Costs

The reference rate used to price Chinese mortgages is expected to be cut next month after being held steady in November, with banks to lend support to the property market recovery despite rising interbank funding costs, advisers and analysts said.

The Loan Prime Rate, which is based on the rate of the People’s Bank of China’s Medium-term Lending Facility and quotes submitted by 18 banks, remained at 3.65% for the one-year maturity and 4.3% for over-five-year maturity on Monday, which was in line with market expectations. (See: MNI PBOC WATCH: Targeted Easing To Boost Credit, RRR Cut Seen)

Funding costs for banks have surged since the start of November, with liquidity deteriorating as the PBOC lowered the injection of funds through the MLF, big banks have provided less capital into the market, tax payments have absorbed liquidity, and some wealth management products have been redeemed, said Minsheng Bank chief economist Wen Bin.

The higher fund costs have been reflected in repo rates, negotiable certificates of deposit (NCD), and bond yields. Wen noted the recent relaxation of Covid measures, and moves to bolster the property market that had boosted confidence in credit expansion, had weighed on bond market sentiment.

The 7-day repo rate has averaged 1.8% so far this month, compared with 1.65% in October and 1.6% in September, according to Wind. The NCD, a major tool for banks to raise funds in the interbank market, jumped to 2.52% last Friday for one-year products rated AAA, up 50bps from early this month.

The rise in money market rates has reversed the improvement in funding costs seen since April, which has squeezed room for banks to lower their quotes for the LPR, Wen said.

Commercial bank interest margins have fallen to a record low. Margins in Q3 narrowed by 13bp to 1.94% compared with the same period last year, according to the China Banking and Insurance Regulatory Commission. The mortgage rate averaged 4.3% in October, down 133bps from the end of the last year and the lowest since 2008.

Banks won’t be able to lower interest rates if funding costs are not reduced, Wen said.

LPR CUT COMING

The unchanged LPR this month reflected rising funding cost for lenders, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. He noted that time was needed to assess the effects of the latest measures aimed at bolstering the real estate sector. He predicted the over-five-year LPR, which banks use to price mortgages, would be cut by about 15bps next month as lower deposit rates had provided banks with some insulation from the squeeze on their margins.

Market concerns about rising funding costs in the interbank market reflect worries the PBOC may start trimming its liquidity injections, an advisor familiar with the monetary policy operations told MNI. However, he said there is no basis for policy tightness considering the sluggish economic recovery.

The PBOC was likely to be more accommodative if there was more fiscal stimulus and targeted relending tools were effective in boosting credit demand, the advisor said.