Chinese Banks Likely to Push Lending Rate Cuts to Later in Year

• Loan prime rates expected to be kept unchanged on Tuesday
• Cuts could come later this year as PBOC keeps easing stance

Chinese banks are expected to keep benchmark lending rates unchanged this week as the central bank pauses monetary easing and defends the yuan, though a reduction is anticipated in coming months.

Sixteen of the 17 economists surveyed by Bloomberg forecast the one-year loan prime rate will be maintained at 3.65% on Tuesday, with only one estimating a 10 basis-point drop in the rate. Eleven of the 12 economists who gave an estimate for the five-year LPR, a reference for mortgage rates, expect it to be held steady. Only one forecast a 15 basis-point reduction.

The LPRs are based on the interest rates that 18 banks offer their best customers and is published by the People’s Bank of China monthly. They are quoted as a spread over the central bank’s rate on its one-year policy loans, known as the medium-term lending facility, which was kept unchanged last week.

Many economists expect banks to lower the LPRs later this year after major lenders cut their deposit rates across the board for the first time since 2015. Lower deposit rates will improve banks’ profitability, giving them further scope to transmit the PBOC’s easing policy and reduce lending rates.

“The possibility of a LPR cut in the fourth quarter is higher than in this month,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc. “It’s too soon to cut it again after the rates were just lowered in August.”

The economy showed some signs of recovery in August, helped by government stimulus, although the growth outlook remains uncertain given an ongoing property market slump and Covid outbreaks.

What Bloomberg Economics Says

We expect banks to keep their one-year and five-year LPR quotes steady after trimming them by 5 bps and 15 bps, respectively, in August.

But China’s bumpy recovery still needs policy support. We see rates heading lower in 4Q.

The central bank is maintaining its easing stance and adopting more structural tools to help the economy. At the same time, it needs to strike a delicate balance with the timing of its stimulus given aggressive US interest rate hikes and the yuan’s depreciation past the 7 per dollar level to its weakest since July 2020. The central bank has taken steps to defend the currency in recent weeks including by setting stronger-than-expected daily fixings.

The PBOC is forecast by analysts to cut the reserve requirement ratio for banks, or the amount of cash banks must hold in reserve, as soon as this month to replace maturing policy loans. Such a move would unleash liquidity to the interbank system and reduce banks’ funding costs, which could drive the LPRs lower.

Many economists including Pang and Liu Peiqian at NatWest Group Plc also see greater scope for a reduction in the five-year LPR going forward to stimulate housing and mortgage demand, which has fallen off a cliff this year. The reduction in three and five-year deposit rates among major banks, at about 15 basis points, was also greater than that for shorter-term deposits, mostly under 10 basis points.

Deposit Rates

Many also think the LPRs could trend lower in the absence of the PBOC’s policy interest rate cut because a reform in deposit rates earlier this year may lead to more flexibility of the rate, which would enable banks to adjust lending rates.

The central bank said it guided banks to set up a new mechanism for the formation of deposit rates in April, under which they take references from the 10-year government bond yield and the one-year LPR, instead of the benchmark deposit rate in the past.

This can help banks better follow changes in market rates, the PBOC said in a report in May. Banks last cut the LPRs in August following the PBOC’s surprise rate reduction in the same month to bolster the economy’s recovery.

Source: Bloomberg