(Bloomberg) -- Chinese banks held their benchmark lending rates after a similar move by the central bank, bolstering expectations that further monetary easing will take place in early 2024.

The nation’s commercial lenders stood pat on their prime lending rates — including a five-year rate used as a reference for mortgages — on Wednesday. That came after the People’s Bank of China kept its so-called medium-term lending facility unchanged last week, following a cut in August. 

“Targeted, quantitative measures remain the preferred tools to support the market and stimulate loans growth, while a small rate cut may not be effective after all,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp Ltd. in Singapore.  

China’s top leaders signaled at two recent policy meetings that they will maintain supportive monetary policy next year. Economists expect that to translate into moderate cuts to PBOC policy interest rates in early 2024 and trims to the amount of money banks must hold, known as the reserve requirement ratio.

Economic data released for November showed China’s economic recovery remains under pressure from weak demand and a lingering property crisis. That weak data has added to calls for President Xi Jinping’s government to offer more support for the nation’s post-pandemic recovery.

Central bank officials pumped a record 800 billion yuan ($112 billion) of one-year loans into the economy last week, helping to allay concerns over cash scarcity. That large liquidity injection dented hopes for a cut to banks’ RRR this month, which would free up long-term cash for lenders. 

Some analysts now expect the PBOC to cut the RRR in the first quarter of 2024. Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group, sees a reduction in January, while Serena Zhou, an economist at Mizuho Securities Co., views February as a more likely window. 

What Bloomberg Economics Says ... 

The decision by China’s commercial lenders to hold their prime rates steady Wednesday reinforces our view that monetary easing in the near term will rely more on quantity than price tools ... Liquidity alone won’t do the trick, though — a point underlined by November’s weak credit data. Feeble aggregate demand is sapping the appetite for borrowing. More policy support, including rate cuts, are needed to stimulate a recovery. 

- Eric Zhu, economist

Read the full report here

Many economists see banks’ shrinking profit margins as a key obstacle to further rate cuts. Authorities have asked lenders to support the indebted property sector and local governments, while at the same time preventing a surge in bad loans. 

Those conflicting goals have led to a fall in outlook for the sector. Banks’ net interest margins have fallen below a level considered necessary to maintain reasonable profit, meaning policymakers may need to their liability costs before they cutting lending rates. 

“We expect the PBOC to prioritize guiding lower deposit rates rather than loan prime rates, considering the tight interest margins for most Chinese banks,” said Mizuho’s Zhou.

--With assistance from Iris Ouyang and Shulun Huang.

(Updates with additional details, comments throughout.)

©2023 Bloomberg L.P.