Chinese banks hold lending rates as PBOC remains cautious

BEIJING (BLOOMBERG) – Chinese banks held their main lending rates steady in the absence of more easing from the central bank, which is trying to strike a balance between preventing faster inflation and supporting the economy.

The one-year loan prime rate (LPR) was left unchanged at 3.7 per cent, in line with all 19 forecasts in a Bloomberg poll of economists, according to a statement by the People’s Bank of China (PBOC) on Wednesday (July 20). It was last lowered in January. The five-year rate, a reference for mortgages, was maintained at 4.45 per cent, in line with most projections.

The LPRs are based on interest rates that 18 banks offer their best customers and are given in quotes as a spread over the rate of the PBOC’s one-year policy loans. The PBOC has kept the one-year medium-term lending facility (MLF) rate unchanged since January.

The announcement “wasn’t a surprise” given the PBOC hasn’t touched the one-year MLF rate, nor have authorities cut the reserve requirement ratio or relaxed mortgage rates lately, said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. China “will be very cautious on unleashing further monetary stimulus in order to preserve policy room,” he said.

The PBOC and Chinese leaders have recently highlighted their concern over the potential transmission of high inflation from overseas, and signaled a reluctance to lower interest rates given ample liquidity in the interbank market. Rate hikes in major economies including the US and European countries have also limited China’s room for monetary easing due to fears that cutting rates while other nations are raising them would lead to capital outflows.

A recent mortgage payment boycott by buyers of unfinished homes had prompted calls for more policy help for the property sector, including a reduction in the five-year LPR. The last reduction in mortgage rates was in May, when banks cut the five-year rate by a record 15 basis points after the PBOC effectively lowered the minimum rate for new mortgages by 20 basis points.

The five-year LPR could be cut later this year, though, according to Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd.

“As the government shows strong intention to support the property sector, the PBOC will tend to drive the five-year LPR lower,” he added.