China’s sizeable cut to its mortgage reference rate, aimed at reviving the housing market and boosting long-term demand for loans, has raised expectations for further policy easing to save the slowing economy.
The People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR) from 4.6 per cent to 4.45 per cent on Friday, which represented the largest cut on record and the second this year after the rate was reduced from 4.65 per cent in January.
The 15 basis points reduction beat expectations, although the central bank’s move to hold the one-year LPR – on which most new and outstanding loans are based – at 3.7 per cent at the May fixing was in contrast with a widely-expected cut by economists.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
There’s a room for both monetary and fiscal easing, and it looks like the LPR confirmed they are on that path of further easing
“The economic shock from Covid lockdowns for this year is similar to the economic impact from the initial wave of Wuhan outbreaks in 2020, but the size of stimulus on the monetary side is only a half of the size they did in 2020,” Robin Xing, chief China economist at Morgan Stanley Asia, told a webinar on Friday.
“There’s a room for both monetary and fiscal easing, and it looks like the LPR confirmed they are on that path of further easing.”
China is battling its worst virus outbreak in more than two years while also being challenged by turbulence in global commodity prices due to the war in Ukraine and capital outflow caused by aggressive US interest rate increases.
This has led to increasing calls for more intensive policies to counter the adverse impact caused by the virus controls to ensure the “around 5.5 per cent” economic growth target for this year is met.
The slump in economic activity in May further bolstered calls for more monetary easing to shore up growth.
“The economic slowdown is severe. The outbreak in Beijing has led to a sharp slowdown of economic activities there. Reopening in Shanghai has started, but the process is quite slow. The government probably feels the urgency to roll out stimulus to boost the economy,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management, who expects more rate cuts over the coming months.
“The government must act quickly and decisively to prevent the economy from falling into a recession.”
Friday’s rate cut came after the central bank reduced the floor on the rate for new mortgages last weekend in an effort to boost the housing market after China’s overall new loans plunged in April due to weakening demand amid the nationwide coronavirus controls.
The lack of a one-year LPR cut suggests the bank may be concerned about the impact across-the-board rate cuts would have on the [yuan]
As long-term loans are also usually linked to the five-year LPR, funding for infrastructure, a tool that Beijing has heavily relied upon to stabilise the economy, should also benefit from the latest rate cut, economists said.
Friday’s move by the central bank will offer support for the housing market and should help drive a revival in sales, “which have gone from bad to worse recently”, said Julian Evans-Pritchard, senior China economist at Capital Economics.
“Currently, the main constraint on property sales are virus restrictions. But as these are relaxed, we think the combination of lower mortgage rates and reduced down payment requirements lay the groundwork for a revival in housing demand,” he said.
“The lack of a one-year LPR cut suggests the bank may be concerned about the impact across-the-board rate cuts would have on the [yuan], which is already under pressure amid capital outflows in response to an unfavourable yield spread with the US.”
Additional reporting by Luna Sun
More from South China Morning Post:
This article China on ‘path of further easing’ after cutting mortgage rate in bid to revive economy first appeared on South China Morning Post