China set to cut lending rates by 10% this month

China set to cut lending rates by 10% this month

A majority of participants believe that China will reduce its lending rates on Monday, with a deeper cut to the mortgage reference to lift the ailing property sector and the overall economy as a result of the Reuters survey.

The prime rate LPR, which banks normally charge their best clients, is set by 18 designated commercial banks who submit proposed rates to the People's Bank of China PBOC Twenty-five out of 30 respondents in the snap poll predicted a 10 basis-point reduction to the one-year LPR.

With 27, or 90% of them, forecast a reduction larger than 10 bps, all 30 participants expected a cut to the five-year tenor. 15 traders and analysts predicted a 15 bps cut, 10 predicted a 20 bps cut, and the remaining two predicted a 25 bps reduction.

The five-year rate, which was last lowered in May, affects the pricing of home mortgages and is now at 4.45%.

The market consensus for LPR cuts this month comes after the PBOC lowered two key interest rates for the second time this year to try to revive credit demand in the COVID-hit economy.

Peiqian Liu, chief China economist at NatWest, said that the LPR is loosely tied to the central bank's medium-term lending facility rate, which might lead to more transmission of easing into the real economy.

We expect 5 Y LPR to be lowered by 15 basis points bps and 1 Y LPR to be lowered by 10 bps as banks step up to support the demand for mortgage loans. The PBOC monetary policy stance was dovish after a series of key measures including credit lending data and activity indicators showed that the economy slowed unexpectedly in July.

The loss of growth momentum has raised the challenge facing policymakers due to mounting headwinds including a resurgence of local COVID 19 cases, inflationary pressures, and a slowing global economy.

Policy insiders and analysts told Reuters that the PBOC is set to take more easing steps, though it has limited room to manoeuvre due to concerns over rising inflation and capital flight.

After this small rate cut and the likely ensuing LPR cut, the space for the PBOC to cut rates will be quite limited due to rising interest rate differential between China and the U.S. and squeezed profit margins for banks, said Ting Lu, chief China economist at Nomura.