MNI PBOC WATCH: LPR Cut Seen In Q1 To Boost Property Market

China’s reference lending rates are expected to be lowered in the first quarter of 2023 to support the ailing property market after they were left unchanged this month as higher wholesale funding costs weighed on lenders, economists 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 website of the People’s Bank of China. The decision was in line with expectations and marked the fourth month that the key rate was held steady.(See: MNI PBOC WATCH: Bank Margin Squeeze Weighs On 5-Yr LPR Outlook)

Lenders have been reluctant to offer lower LPR quotes considering the higher funding costs in recent months due to rising rates on Negotiable Certificates of Deposit (NCD), a major source of funding in the interbank market, Ming Ming, chief economist at Citic Securities, told MNI. Bank margins will further be squeezed next year by the cumulative 15bps cut in the one-year LPR and 35bps in over-five-year LPR in 2022, which will bring down the interest rates on outstanding loans.

The two cuts to the reserve requirement ratio in 2022, which delivered a CNY12.1 billion reduction in funding cost, were not enough to prompt lower LPR quotes, Ming said.

Ming forecast the LPR would be lowered in Q1, which would be coordinated with efforts to lower banks’ borrowing costs, such as guiding down deposit rates, given the PBOC’s focus on credit expansion to boost economic growth.

The strong pro-growth signals from the just-completed Central Economic Work Conference would likely lead to a cut in the LPR in the first quarter, particularly the over-five-year rate, which would stimulate credit demand and help shore up the property sector, said China Minsheng Banking Corp chief economist Wen Bin.

A lower over-five-year LPR would lower rates on outstanding mortgages, helping improve household balance sheets and assist a recovery in consumption, Wen said.

The rise in wholesale money price may not be sustainable, thus helping lower banks’ borrowing costs, Ming said.

Rising rates on NCD have been caused by lower liquidity since August as the PBOC reduced MLF injections, while increased credit supply absorbed excess reserves of lenders, Ming explained. He also noted that rising liquidity demand at year-end and big redemptions of wealth management products had also steered wholesale funding rates higher.