MNI PBOC WATCH: Stable 5-Yr LPR Fuels Bet On Property Stimulus

A smaller-than-expected reduction in China’s reference lending rate likely reflects concern over a weakening yuan and has also fueled speculation the People’s Bank of China is preparing measures to lower interest payments for existing mortgage holders while guiding down deposit rates to safeguard lenders’ interest margins, economists told MNI.

The decision to leave the five-year plus maturity for the Loan Prime Rate (LPR) unchanged at 4.2% shocked the market Monday, after traders and analysts had bet on a 10-15bp cut in line with the PBOC’s decision last Tuesday to reduce the Medium-lending Facility by as much as 15bp and the seven-day reverse repo rate by 10bp. (See MNI PBOC WATCH: Data-Driven PBOC Cuts Could Push LPR Lower) The 10bp reduction in the one-year LPR also landed at the bottom of expectations.

The unchanged five-year LPR could mean that measures to reduce outstanding mortgage rates are coming soon, with the PBOC mindful of the impact of a lower benchmark on lenders’ already compressed margins, said Zhu Qibing, chief macro analyst at BOC International.

Further policy rate cuts were still possible if credit markets dip sharply again or wholesale rates fall much below the Bank’s open market operation rates, but these would represent “extreme scenarios,” Zhu added.

The widening interest-rate spread between China and the U.S which has pressured the yuan has likely kept the PBOC from cutting rates, he said, though he added that the central bank was likely to have to reduce reserve requirement ratios in order to guarantee liquidity.

MORTGAGE RATES

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, told MNI that financial regulators have signaled that banks should address the gap between rates of new and existing mortgages, by reducing the burden on people who already have loans.

Rates on outstanding mortgages could be cut by 50-100 basis points, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating, who expected the PBOC to continue to guide down deposit rates to take pressure off bank funding costs.

Commercial banks’ net interest margin dropped to a record low 1.74% in Q2, according to the PBOC, which in its Q2 monetary policy report issued last week highlighted the importance that banks maintain “reasonable profits and net-interest margins to ensure operational stability and prevent financial risks.”

Narrow interest margins made banks reluctant to adjust their five-year LPR quote, which had contributed to the decision to hold the rate steady, said Ming Ming, analyst at Citic Securities.

DEPOSIT RATE

A fresh round of deposit rate reductions could occur soon following the 20bp one-year LPR cuts over June and August and the continuing fall in the 10-year CGB yield, Wang said, with Dong adding that such cuts would incentivise lenders to continue lowering loan rates, boosting consumption and investment.

Commercial banks’ net profits grew by 2.6% to CNY1.3 trillion in the first half of this year, down from 4.5% growth over the same period in 2022, National Administration of Financial Regulation, data shows.