20 Dec 2021

(Yicai Global) Dec. 20 — The People’s Bank of China has lowered the one-year loan prime rate, its lending benchmark for new bank loans to households and businesses, by five basis points. It is the first decrease in 20 months and is likely to slide further next year, analysts said.

The 12-month LPR now stands at 3.8 percent, the central bank said today. The five-year and above LPR remains unchanged at 4.65 percent.

The reduction will lower overall financing costs and greatly support the real economy, said Yan Se, associate professor at the Guanghua School of Management, Peking University.

The central bank is likely to further reduce the LPR and the Medium-term Lending Facility in the first quarter next year, Yan said. Marginal monetary easing will continue in the medium- and long-term, and it is a general trend that the interest rates will go downward.

There is still some room for the LPR to come down, said Wang Qing, chief macro analyst at Golden Credit Rating International. The PBOC is also likely to further lower the reserve requirement ratio in the first half next year as well as the MLF, he added.

The reserve requirement ratio cuts in July and earlier this month have reduced banks’ cost of capital, said Ming Ming, deputy director at the Citic Securities Research Institute. The LPR cut will guide loan rates downwards and release a signal to reduce corporate financing costs, he added.

The 5-basis-point reduction is less than the 20-bps cut in April last year and indicates that lenders are surrendering reasonable benefits to the real economy, said Zhou Maohua, an analyst at China Everbright Bank’s financial market department. The Covid-19 pandemic has been effectively controlled, the economy is resilient and monetary policy remains prudent.

The LPR cut reduces the need for the MLF to be lowered and thus is not good for the bond market, said Zhang Xu, fixed-income chief analyst with Everbright Securities.

Housing loan rates are mainly based on the five-year LPR, Yan said. China sticks to the principle that houses are to live in and are not for speculation and does not want to see economic growth depend too much on the real estate sector again. Hence the five-year LPR remained unchanged.