PBOC LPR REVIEW: 1yr maintained but the 5yr cut, likely designed to support the property sector

Analysis details (07:50)

• The PBoC surprisingly maintained the 1-year LPR was at 3.45% (exp. 5bps cut), but the 5-year LPR was cut by 25bps to 3.95% (exp. 10bps reduction), with the latter the reference rate for mortgages in China. Desks are viewing it as a move to support the property sector, a signal of targeted easing, and a dovish policy stance. That being said, analysts question banks' willingness to extend mortgages at lower, less profitable rates with potential pressure on net interest margins.


• Analysts at Oxford Economics suggest that the root of China's property sector issues lies beyond just mortgage affordability, pointing to a broader range of economic and structural challenges. The desk underscores the importance of viewing this rate cut within a larger context of measures aimed at managing a property market correction. OxEco sees the move as a response to the incremental policy easing's limited impact, indicating a deeper concern among Beijing policymakers about the property market's challenges.


• The desk at ING discusses the potential pressure on Chinese banks' net interest margins, given the already low levels prior to this policy action. It suggests that while the cut aims to support the property market, it could exacerbate financial challenges for banks. ING anticipates continued accommodative monetary policy in China, with room for further easing, including additional cuts to the LPR and the reserve ratio requirement, especially if global central banks shift toward rate cuts.


• MARKET REACTION: CNH was choppy on the release whilst the Hang Seng and Shanghai Comp. were initially lacklustre before the latter closed +0.4%. Hang Seng is still open +0.4% last.

20 Feb 2024 - 07:50- Fixed IncomeResearch Sheet- Source: Newsquawk