China implemented the biggest-ever cut to a mortgage rate benchmark on Tuesday, indicating policymakers' dedication to bolster the struggling housing sector and the broader economy, with additional interest rate cuts likely on the horizon, experts said.
The over-five-year loan prime rate, on which lenders base their mortgage rates and long-term corporate loans, dropped by 25 basis points to 3.95 percent, the biggest cut since the rate started to serve as a benchmark in 2019, the People's Bank of China, the country's central bank, said on Tuesday.
The one-year LPR, the benchmark for short-term loans, however, was left unchanged at 3.45 percent on Tuesday. The targeted cut to the over-five-year LPR alone, experts said, has delivered a clear policy intention of stimulating housing demand as home sales remain sluggish. In response, China's stocks closed higher on Tuesday.
Basic calculations indicate that Tuesday's cut can save about 150 yuan ($20.84) in monthly payments, or about 52,000 yuan in total, for a new homebuyer availing a 30-year, 1-million-yuan mortgage.
"It's a relatively sizable alleviation of homebuying cost, which will encourage households to take on mortgages, boost consumer spending and facilitate a revival in the housing market," said Yan Yuejin, director of the E-house China Research and Development Institution.
Tuesday's cut has sent minimum interest rates of newly added first-home mortgages to a level below 4 percent, except for core areas in Beijing. In other words, mortgage rates in China will further decrease from a record low — the weighted average of interest rates of new mortgages came in at 3.97 percent in December, the lowest since the record started in 2008, according to market tracker Wind Info.
Despite previous measures to stimulate the housing market, the area of residential properties sold in 30 large and medium-sized cities still dropped by nearly 7 percent from a year earlier in January, which may have necessitated Tuesday's cut, said Wu Chaoming, deputy director of the Chasing International Economic Institute.
"Easing is expected to remain the main tone of monetary policy," Wu said, as not only the property market is yet to bottom (out) but the challenge of insufficient demand remains acute, with deposit interest rates likely to further decline.
With the growth in the consumer price index, a main gauge of inflation, staying negative for four consecutive months to January as an indication of weak demand, the PBOC has stressed the need to keep price levels at a reasonable range in its fourth-quarter monetary policy report.
Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the PBOC will likely cut the medium-term lending facility rate — a key policy benchmark of interest rates — in the near future as Tuesday's cut may not fully address the issue of low price growths and rising real borrowing costs.
However, Charlie Zheng, chief economist at Samoyed Cloud Technology Group Holdings, said the PBOC may remain cautious about cutting the MLF rate due to concerns over more weakness in the yuan.
"Without a rate cut from the U.S. Federal Reserve, the PBOC may choose not to reduce the MLF rate."
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