China makes the biggest cut in its key mortgage interest rate. The first cut since June is a “step in the right direction” to stimulate the economy

Cutting the LPR interest rate is another step in the right direction to address China's deflation problem, Zhang Zhiwei

The move is intended to further reduce the burden on households and also stimulate home purchases.

China's real estate mortgage loans totaled 38.2 trillion yuan ($5.3 trillion) at the end of December, government data showed.

Meanwhile, the one-year LPR – an indicator of market lending rates – remained unchanged at 3.45 percent.

“Cutting the LPR interest rate is another step in the right direction to address the deflation problem in China,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, adding that more aggressive fiscal easing is needed to achieve this to increase effectiveness.

“I think there will be more interest rate cuts in China this year. As the [US Federal Reserve] As the central bank enters the interest rate cutting cycle, the constraints faced by the PBOC will be eased. Interestingly, the PBOC’s rate cut was larger than the market expected, which may indicate that policymakers have recognized the urgency to take quick action.”

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China has already taken various measures to shore up its flagging real estate sector.

An urban real estate financing coordination mechanism has been established in more than 100 cities to strengthen coordination between local governments and housing authorities and meet the financing needs of real estate projects.

Loans for real estate projects worth more than 160 billion yuan ($22.2 billion) have been expanded under the mechanisms, state broadcaster CCTV said on Tuesday.

But despite cutting the five-year LPR to a record low, the central bank remained reluctant to accept the large and broad-based interest rate cuts that would be needed to drive a sharp acceleration in credit growth and therefore economic activity, analysts at Capital Economics said.

The main obstacle to recovery is a lack of confidence in developers' ability to deliver homes that have already been sold. Capital Economics

“The latest cut alone will do only so much to boost property sales. Mortgage rates have already fallen nearly 200 basis points since the end of 2021, yet home sales have continued to decline,” they said.

“The main obstacle to recovery is a lack of confidence in developers’ ability to deliver pre-sold homes.

“That’s why efforts to ease developers’ funding constraints are arguably more important.

“We expect at least one more rate cut this year, but the PBOC falls far short of the large, broad-based rate cuts needed to spur a recovery in private sector credit demand and economic growth.”

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The bank remains concerned about the impact that sweeping interest rate cuts could have on the yuan, which has come under renewed pressure from rising U.S. bond yields, while improving the allocation of existing loans appears more urgent than faster growth in new loans, added Capital Economics.

Last year, commercial residential sales area was 1.12 billion square meters (12.06 billion square feet), down 8.5 percent from the previous year, with residential sales area falling 8.2 percent, according to National Statistics Office.

Meanwhile, commercial residential property sales revenue fell 6.5 percent to 11.66 trillion yuan, with residential property sales falling 6 percent.

The cut would help the overall property market as property demand returns with cheaper mortgage rates and falling property prices, said Xu Tianchen, senior China economist at the Economist Intelligence Unit.

“However, existing homes are expected to benefit the most, while the off-plan property market will continue to struggle as financing difficulties impact construction,” he said.