PBOC: Loan prime rate cut by 5 basis points

While the loan prime rate (LPR), which is considered as the shadow policy rate in China, was reduced from 3.85% to 3.80%, the 5-year interest rate remained unchanged at 4.65%.

While the loan prime rate (LPR), which is considered as the shadow policy rate in China, was reduced from 3.85% to 3.80%, the 5-year interest rate remained unchanged at 4.65%. While the LPR is mainly based on the loan rates applied to large customers (which, after the RRR cuts, it seems that the Central Bank wants to reduce the loan costs even more), it is very likely that the interest rates on housing loans and medium-term loans will be reduced in the future.

 

Problems related to economic growth; It emerges on the axis of renewed economic risks associated with the spread of the Covid-19 variant and headwinds facing the economy due to the downturn in the country's property market. Our expectation for lower interest rates on housing loans stems from the shrinkage risks in the real estate sector and its spillover effect on the economy. CPI in China is at 2.3%, so real interest rates are positive. This theoretically shows that they can use RRR discounts and discount areas at rates such as LPR, MLF. The factor that can create a headwind to this is the Fed's move towards tightening.

 

The Central Bank had cut most banks' reserve requirement ratios by 0.5 percentage points and released 1.2 trillion yuan ($188 billion) of liquidity earlier in the month. In the midst of the developments that shook the bond market and the liquidity squeeze, the central authority will be in a position to evaluate the RRR discount more.

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