Loan prime rates decline 10bps
In a surprise move, the central bank (PBoC) announced banks’ benchmark lending rates have declined.
The details: The PBoC disclosed that the one-year loan prime rate (LPR) – the benchmark rate for pricing most corporate bank loans – dropped by 10 bps to 3.35%.
- Meanwhile, the five-year LPR – mainly used as the benchmark for mortgage rates – dropped 10 bps to 3.85%.
The five-year was last cut in January, and the one-year in August.
Some context: The LPRs are calculated monthly based on the average interest rate China’s biggest commercial banks charge on loans to their lowest-risk customers.
Separately, the PBoC also said banks can reduce the amount of collateral posted against funds borrowed via its medium-term lending (MLF) facility, saying the change will:
- “Increase the volume of tradable bonds and ease…pressure in the bond market”
Get smart: The LPR reductions were a surprise, but they shouldn’t have been.
- We’ve long argued the PBoC is reluctant to cut lending rates without reducing bank funding costs first.
- The PBoC did exactly that in April when it stopped banks manually topping up interest payments on large customers’ deposits – an illegal but widespread practice that pushed up banks’ costs.
Get smarter: The cuts won’t be stimulatory, but they will provide relief.
- For industrial firms, lower rates will ease the pain of persistent deflation.
- Local government financing vehicles – whose long-term loans are benchmarked against the five-year LPR – will enjoy lower debt servicing costs when refinancing their loans.