After the People’s Bank of China (PBC) on Monday decided not to cut an important interest rate that influences mortgages, disappointed analysts and economists said restoring faith in China’s troubled real estate sector, which has dragged down the world’s second-largest economy, will be difficult.
In a smaller-than-anticipated move, the PBC lowered its one-year prime rate (LPR) for loans with a term of one year from 3.55 percent to 3.45 percent, whereas the benchmark rate used to set mortgage rates (the five-year LPR) has stayed intact at 4.20 percent. The consensus among experts was for a reduction of 15 basis points (bps) in both rates.
“The five-year rate is the reference rate for banks for mortgage lending, but PBC has not reduced that and reduced the one-year rate. At a time when China wants to support its economic recovery, the one-year rate reduction is a disappointment,” Raymond Yeung, chief economist of Greater China at the ANZ Group, told The Epoch Times.
According to Mr. Yeung, the LPR is the standard against which commercial banks base their interest rates for lending to consumers and businesses. Most loans with terms of one year or less are influenced by the one-year rate, whereas mortgages and other longer-term loans are influenced by the five-year rate.
Those taking out loans or making interest payments, hence, would benefit from a reduced LPR but not businesses and the broad economy, since the existing mortgage interest rate at 4.8 percent is much higher than the interest rate for new mortgages.
Policymakers had hinted in July that they would direct banks to adjust and lower interest rates on current mortgages, Mr. Yeung added.
According to economists, confidence has emerged as an essential element of China’s economic recovery, and the disappointing LPR cut would not only undermine confidence but could “even backfire if market participants interpret these easing measures as policymakers’ unwillingness to deliver even moderate policy stimulus,” said Goldman Sachs in a note.
Considering the deterioration of property indicators and weak activity growth, more policy easing is needed, added the note.
On monetary policy, Goldman Sachs feels that the PBC should cut the reverse repo rate (RRR) by 25 bps and the seven-day open market operations (OMO) rate in the second half of the financial year.
The RRR is the interest rate at which a country’s central bank borrows money from domestic commercial banks. OMO refers to a central bank’s open market purchases and sales of government securities when it needs to infuse liquidity into the monetary system. During times of inflation or deflation, a central bank employs both tools for managing the money supply.
