China cut benchmark one-year lending rate by 10 bp, surprised market by keeping 5-year rate unchanged

 

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China lowered its one-year benchmark lending rate in an effort to ramp up efforts to stimulate credit demand, but surprised markets by keeping the five-year rate unchanged amid broader concerns about a rapidly weakening currency.

The benchmark one-year Loan Prime Rate (LPR) by 10 basis points to 3.45% from 3.55% previously, the second cut of the rate this year, while the five-year LPR was kept unchanged at 4.2%.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China cut both LPRs by 10 basis points in June to boost the economy.

The one-year LPR cut came after the People’s Bank of China (PBOC) last week unexpectedly cut the interest rate on one-year medium-term lending facility (MLF), which serves as a guide to the LPR and is widely viewed as a precursor to future changes to the lending benchmarks, by 15 basis points to 2.5%. The central bank also cut the 7-day reverse repurchase rate and the rate on the Standing Lending Facility (SLF) by 10 basis points.

The steady five-year LPR caught analysts off the guard, with some expecting the troubled property sector and rising default risks at some developers would have led to deeper cuts to the benchmarks.

The interest rate on newly issued loans has reached historical lows while banks’ net interest margin (NIM) have been under pressure said Wen Bin, chief economist at China Minsheng Bank.

To maintain a reasonable profit level for banks, the 5-year LPR was left unchanged, which could reserve the room for lowering rates on existing home mortgage loans, said Wen.

Notably, the PBOC said in its quarterly monetary policy implementation report, released last week, that commercial banks should maintain a reasonable profit and NIM level and banks should have certain financial strengthen to deal with risks.

The central bank has also pledged to keep liquidity reasonably ample and its policy “precise and forceful” to support the economic recovery, amid rising headwinds, according to its second-quarter monetary policy implementation report.

The central bank said it will optimise credit policies for the property sector, while co-ordinating financial support to resolve local government debt problems, it said in a statement on Sunday.