(Bloomberg) -- Chinese banks maintained their benchmark lending rates for a third month with economists saying the outlook for further easing has diminished as the central bank signals more caution about the inflation outlook.
The one-year loan prime rate was left at 3.65%, according to a statement by the People’s Bank of China on Monday, in line with most forecasts in a Bloomberg survey of economists. The five-year rate, a reference for mortgages, was also maintained at 4.3%.
The LPRs are based on the interest rates that 18 banks offer their best customers and are published by the PBOC monthly. They are quoted as a spread over the central bank’s rate on its one-year policy loans, known as the medium-term lending facility, which has been kept unchanged since a surprise reduction in August.
The PBOC warned last week that inflation may accelerate as overall demand in the economy picks up, suggesting the scope for further monetary policy easing may be limited. The government also took steps this month to address the property crisis, indicating less need for monetary easing.
“The chance for PBOC easing has fallen given the recent announcement of property easing,” said Michelle Lam, Greater China economist at Societe Generale SA, who forecasts no change in the LPRs by the end of this year.
The central bank’s focus has shifted recently to stabilizing liquidity conditions following turmoil in the bond market. A burst of optimism about the economy last week prompted investors to ditch bonds in favor of risker assets. The selloff has since eased, leading the central bank to withdraw short-term cash from the financial system for the first time in nearly two weeks on Monday.
What Bloomberg Economics Says...
“A recent relaxation in Covid rules and a rescue package to buoy the property sector have reduced the need for further monetary easing in the near term. We see the PBOC delaying any rate cut until the first quarter of 2023 -- making it likely that the LPRs stay steady until then.”
-- Eric Zhu, China economist
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Part of the optimism last week was driven by the government’s recent relaxation of some Covid controls, fueling hopes the country will reopen and the economy will recover. However, surging Covid cases across the country mean several cities are still tightening controls to curb infections, clouding the growth outlook.
Analysts said the drop in mortgage rates also suggests there’s less need for banks to lower longer-term rates. The PBOC has allowed some cities where home prices are falling to set mortgage rates lower than the official floor, which is 20 basis points below the five-year LPR.
The average interest rate of new mortgages granted in October was 4.3%, the lowest since comparable data began in 2009, according to figures from the PBOC.
“There is still room for mortgage rates in some cities to move lower even without a LPR cut and therefore banks may not be in a rush to lower LPR now,” said Xiaojia Zhi, head of research at Credit Agricole CIB’s Hong Kong branch. There’s still room for the five-year LPR to decline by 10 to 20 basis points by June 2023, according to Zhi.
--With assistance from Qizi Sun.
(Updates with additional details throughout.)
©2022 Bloomberg L.P.
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