China cuts benchmark loan, mortgage reference rates, signals ‘particular concern’ for housing market
- China’s one-year loan prime rate (LPR) was cut from 3.7 per cent to 3.65 per cent, the People’s Bank of China (PBOC) said on Monday
- The five-year LPR, which is the reference for mortgages, was also cut from 4.45 per cent to 4.3 per cent
China cut its two key benchmark lending rates on Monday amid multiple challenges facing its slowing economy, with the larger cut to the mortgage reference gauge signalling particular concern for the nation’s housing market.
The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – was cut from 3.7 to 3.65 per cent at the August fixing, the People’s Bank of China (PBOC) confirmed.
The five-year LPR – which is a reference rate for mortgages – was also cut from 4.45 to 4.3 per cent.
“Banks in China cut the one-year loan prime rate by five basis points, but cut by 15 basis points the five-year rate. This signals banks are supporting mortgage borrowers,” said Iris Pang, chief economist for Greater China at ING bank.
“It was surprising that banks cut the one-year loan prime rate by only five basis points this month. It could be that banks chose to leave rate-cut room for long-term loans, and instead, cut 15 basis points from the five-year loan prime rate.
“Most home mortgages are linked to the five-year loan prime rate. So, this rate cut is obviously to reduce the burden on borrowers.”
The LPR has been considered China’s de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s MLF.
MLF loans are a key tool used by the central bank to release medium-term liquidity into the interbank market.
China’s property sector has taken a sharp downwards turn over the past two years, due primarily to a regulatory crackdown on lending and the impact of the coronavirus.
“The cuts will lower interest payments on existing loans, taking some pressure off indebted firms. It will also nudge down the price of new loans. The much larger cut to the five-year rate suggests the PBOC is particularly concerned about problems in the housing market,” said Sheana Yue, China economist at Capital Economics.
“However, homebuyers with existing mortgages will have to wait until the start of next year for the change to affect them. What’s more, the current weakness in loan demand is partly structural, reflecting a loss of confidence in the housing market and the uncertainty caused by recurrent disruptions from China’s zero-Covid strategy. These are drags that can’t be easily solved by monetary policy.”
China’s top leadership insisted on striking a balance between growth, coronavirus control and development security in its quarterly economic analysis conference at the end of July.
“All told, the impression we get from all the PBOC’s recent announcements is that policy is being eased, but not dramatically. We anticipate two more 10-basis-point cuts to the PBOC policy rates over the remainder of this year, and continue to forecast a [reserve requirement ratio] cut next quarter,” Yue added.
“The bank is also likely to make use of other measures to encourage banks to lower lending rates. Although further easing measures are on the cards, credit growth is proving less responsive to policy loosening than in the past. What’s more, the PBOC still appears reluctant to embrace large-scale stimulus despite a slowdown in credit growth. As such, we think any additional support will fall short of driving a strong recovery.”