China: PBoC reduces the LPRs – UOB

UOB Group’s Economist Ho Woei Chen, CFA, evaluates the latest move by the PBoC.

Key Takeaways

“The People’s Bank of China (PBoC)’s benchmark 1Y Loan Prime Rate (LPR) was fixed lower by a smaller-than-expected 5 bps to 3.65% (Bloomberg and UOB est: 3.60%) compared with the 10 bps cut to the 1Y medium-term lending facility (MLF) earlier this month. This is the first cut since Jan when the 1Y LPR was set lower by 10 bps.”

“Comparatively, Chinese banks have set the 5Y LPR lower by a larger 15bps to 4.30% (Bloomberg est: 4.35%). This follows 15 bps cut in May and 5 bps cut in Jan this year. The larger cut to the 5Y rate which mortgages are benchmarked against, suggests that authorities are increasingly concerned over the real estate downturn and continued to guide banks to set LPRs lower, in particular for the longer-tenor.”

“With the less optimistic outlook for the Chinese economy and measured pace of monetary policy easing so far, the 1Y LPR could continue to move lower to 3.55% by end-4Q22, instead of our earlier expectation that the monetary easing would cease by end-3Q22. After 35 bps cut YTD, the 5Y rate is still poised to fall further as PBoC extends support to the property market. However, there is less room for aggressive monetary policy easing by cutting interest rates and the PBoC will likely focus on using targeted tools including the relending programmes and guiding banks to increase credit.”