MNI PBOC Watch: LPR Cut To Guide Mortgages, RRR Easing Eyed

MNI (BEIJING) - The People's Bank of China could reduce the reserve requirement ratio by 25-50 basis points later this year to support the government’s 5% annual GDP growth target, following Monday’s 25bp reduction to the loan prime rate, but will likely hold off on further policy adjustment this year as it observes the economy.

Authorities reduced the one-year LPR to 3.1% from 3.25%, while the five-year plus rate fell to 3.6% from 3.85%, marking its third cut this year. Both rates were reduced 10bp in July, while the over five-year maturity fell 25bp in February. 

Today’s move, while expected, was the largest cut since the PBOC reformed the LPR pricing system in 2019. (See MNI PBOC Watch: China To Cut LPR 20-25bp To Support Demand) .

PBOC Governor Pan Gongsheng signaled the move in September alongside the reveal of unexpectedly strong easing measures, which included a 50bp RRR cut, a 20bp 7-day reverse repo rate reduction and a 30bp easing of the medium-term lending facility rate. 

The LPR will likely hold for the rest of the year as the Bank observes the impact of the collective easing measures. However, Pan has noted an additional RRR cut was possible and would be driven by liquidity needs. (See MNI EM: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional)

MORTAGE RATES

The PBOC will likely maintain a supportive policy stance over Q4 to ensure the 5% GDP target, a task that has increased in difficulty following Q3’s 4.8% y/y print. The economy will now need to grow by 5.3% over Q4 to meet the government’s goal. (See MNI: China Needs Over 5.1% Growth In Q4 To Meet Targets )

Macroeconomic indicators edged up in September with industrial production, investment, and retail and real-estate sales improving over the month despite slower exports, according to the National Bureau of Statistics. Consumption, however, continued to disappoint.

Governor Pan highlighted the importance of spending for the economy last week, stressing the sluggish real estate and stock markets had imposed major challenges. 

LOWER FUNDING COSTS 

Mortgage rates have fallen about 100bp this year, thanks to a combination of LPR and existing mortgage rate cuts, which should significantly relax the burden on house buyers and boost consumption, Chinese media reported citing “people close to the central bank”. Monday’s LPR cut will pull Beijing, Shanghai, and Shenzhen’s mortgage rate down to 3.15%.

Lower deposit rates also contributed to the LPR reduction, which is constituted using quotes submitted by 20 banks based on their funding costs. Lenders have reduced their deposits twice this year across a range of savings products, which has lowered their borrowing costs and slowed the narrowing of their interest margins.