China Loan Prime Rate Cut Disappoints as Mortgage Rates Remain Unchanged

The People’s Bank of China has implemented a smaller-than-expected reduction in its one-year loan prime rate (LPR) on Monday, while keeping the five-year rate steady as the nation faces slowing economic growth.

The central bank has lowered the one-year LPR to 3.45%, down from 3.55%. In contrast, the five-year rate, which influences mortgage rates, remains unchanged at 4.20%. Analysts had anticipated a more significant reduction of 15 basis points (bps) for both rates.

A cut in the LPR had been largely anticipated, particularly after the central bank reduced medium and short-term lending rates by 15 bps each in the previous week, amid rising concerns about the Chinese economy. The LPR is determined by the central bank based on inputs from 18 designated commercial banks and serves as a benchmark for borrowing conditions across the country.

This latest rate adjustment is viewed as disappointing, especially as the People’s Bank of China (PBOC) grapples with the delicate task of supporting the economy while trying to curb further depreciation of the Chinese currency. Recently, the currency hit its lowest level in over nine months.

The PBOC has reiterated its commitment to inject more liquidity into the economy, as it confronts declining business activity and a growing deflationary trend. Economic indicators for July presented a grim outlook for the Chinese economy, which saw minimal growth in the second quarter.

While market participants welcomed the interest rate cuts, there are increasing calls for the government to introduce more targeted fiscal measures to stimulate growth.

This situation is compounded by ongoing challenges in China’s real estate sector, with major firms currently facing potential defaults. The PBOC was anticipated to lower the five-year LPR to relax lending conditions further and bolster the real estate market.

However, analysts have tempered expectations regarding fiscal support from the Chinese government, with Fitch Ratings warning that such initiatives could jeopardize China’s sovereign credit rating. Fitch expects Beijing to refrain from substantial fiscal stimulus.

Although Chinese officials have promised additional measures to foster domestic spending, details on how these initiatives will be implemented remain scarce.