PBOC WATCH: Policy Rate Stable, Property Market On Watch

The People’s Bank of China will likely keep policy rates steady over the next one-two quarters as previous easing moves boost credit expansion and real loan rates fall to a record low, despite property markets still requiring policy support, economists and advisors told MNI.

The central bank will likely hold interest rates and the reserve requirement ratio as the economic slowdown eases in Q2 and it will maintain flexibility in H2 to monitor economic performance and the U.S. Federal Reserve’s policy stance. The medium-term lending facility’s interest rate and the loan prime rate will likely remain unchanged over the next one or two quarters, said Wang Jun, chief economist at Huatai Asset Management.

The PBOC has kept the MLF steady for nine months, which has meant the LPR has not changed over the past eight months. PBOC’s seven-day repo rate, meanwhile, has maintained the same level since last August. (See: MNI PBOC WATCH: LPR Rate Seen Held Steady)

Zou Lan, head of the Monetary Policy Department at the PBOC, told reporters last week that the central bank will keep policy rates at appropriate levels and avoid big changes when making decisions, taking lessons from the collapse of Silicon Valley Bank and last year's volatility across China’s wealth management market. (See:MNI BRIEF: PBOC Aims At Steady Interest Rates To Avoid Risk）

Judging from recent PBOC signals, the Bank remains satisfied with the policy rate’s level and will rely on its targeted tools to support key sectors, Wang said. The Bank may continue to guide down banks’ deposit rate to reduce the funding cost of lenders, he added.

PROPERTY FOCUS

The Bank will focus on the performance of the property market as a key factor determining the need for policy-rate cuts, particularly to the over five-year LPR – a reference lending rate for medium- and long-term loans, such as mortgages.

Cities have already allowed a reduction to local mortgage rates and they cannot move much lower as house prices are rising, which makes an LPR reduction less necessary, Yan Yuejin, director at E-house China Research and Development Institution, told MNI

The PBOC’s latest data shows new mortgages in March carried an average 4.14% rate, down 135bps y/y, after 83 cities lowered the bottom line of rates for first-house buyers by 10-40bps.

Zou noted higher mortgage lending and developer bank loans in Q1 shows the property market has improved and confidence is returning. The central bank will closely watch the credit and financial conditions of the sector, guarantee a stable funding environment and enhance support for house construction, he said.

However, Yan argued the recovery is still fragile. April’s data showed new house sales dropped m/m, particularly in tier three and four cities, he added. Despite a rebound in new house floor space from February to April, the recovery’s pace has slowed, he warned.

The Government must continue to provide supportive policy to consolidate the sector’s recovery, including the easing of house sale restrictions, lowering the down-payment ratio and facilitating house transactions among others, he suggested.

Wang said the PBOC should consider a “targeted rate cut” for the property sector, such as a mortgage rate reduction for second-house buyers and for outstanding mortgages. The economic recovery has not stabilised and could be impacted by weak demand, Wang continued.

Both consumption and investment will depend on accommodative policy. Employment, particularly high youth unemployment, and the possible decline of exports in H2, means policymakers must remain flexible and react promptly to domestic and external changes, Wang noted.