(Bloomberg) -- China ramped up support for the troubled property sector with its biggest-ever cut to a key mortgage reference rate. But it was met with a muted response from investors, raising expectations that more aggressive measures to support the economy will be needed in the months to come. 

Chinese lenders slashed their five-year loan prime rate by 25 basis points to 3.95%, the People’s Bank of China announced Tuesday. It was the first cut since June and the largest reduction since a revamp of the rate was rolled out in 2019.

Still, the move failed to impress investors. China’s benchmark CSI 300 Index ended 0.2% higher in what was largely a listless session. The yuan was little changed after support from state banks earlier in the day and yields on China’s government bonds — which have been falling on greater bets for easing — slipped 2 basis points to 2.42%. China developer stocks initially jumped, but quickly tapered the move to trade only modestly higher.

“A bigger cut may boost housing sentiment in the near-term, though this unlikely marks a turnaround in the property sector,” said Alex Loo, macro strategist at TD Securities in Singapore. 

Lowering the loan rate will allow more cities in China to reduce minimum mortgage rates for homebuyers, which can stimulate sluggish demand for apartments as prices fall. The move shows an intensifying focus on measures to combat the property crisis, which has been a major drag on the world’s second-largest economy and threatens its path toward sustainable growth. 

Loo cited the nation’s “urgency” to entice more homebuyers as property sales in key cities slumped during the week-long Lunar New Year holiday. Next month is traditionally a peak season for home sales, making any efforts to spur more purchases all the more timely. 

“It is delivering stronger dose of easing to the economy,” said Michelle Lam, economist at Societe Generale SA. She added that the cut may reflect more support for mortgage demand and long-term corporate loans “while reducing risks of idle use of funds.”

Banks also maintained their one-year loan prime rate — the de facto benchmark lending rate — at 3.45%. While expectations for a smaller reduction in the five—year LPR were fairly widespread, economists were split on a one-year LPR cut. 

The move comes ahead of the National People’s Congress, which is set for early March. That annual legislative session is where the government is expected to unveil its official growth target for 2024, as well as detail of fiscal stimulus for the year. 

Policies introduced around then will be key to assessing the growth outlook, said Gary Ng, senior economist at Natixis SA.

Even so, it’s not clear the five-year LPR cut will offer much of a boost. 

The average rate of new mortgages granted in December had already fallen to a record low of 3.97%, while mega-cities like Beijing, Shanghai and Guangzhou have been relaxing curbs on home purchases for months. A grim job market made households reluctant to borrow, and unfinished housing projects across the country serve as a reminder to the risk of investing.

The cut will probably provide the most benefit for new homebuyers right now, since many existing mortgages — which were worth 38 trillion yuan at the end of 2023 — are only repriced at the beginning of the year.

Several economists pointed to the need for additional easing this year — including through cuts to the central banks one-year policy loan rate, or the medium-term lending facility rate. The PBOC refrained from lowering that rate on Sunday, making Tuesday’s action the first time since May 2022 that the five-year LPR rate was cut following an MLF rate hold. 

The LPRs are based on the interest rates that 20 banks offer their best customers, and are quoted as a spread over the central bank’s MLF rate. The PBOC, which publishes the LPRs monthly, is seen as having significant sway over them. 

The LPR cut “looks late. The distress has been passed onto domestic demand,” said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group Co. Ltd. He projects 20 basis points worth of cuts to policy rates this year. 

What Bloomberg Economics Says ... 

“The hold on the one-year loan prime rate — after rounds of cuts in deposit rates and the reduction in the reserve requirement ratio that took effect Feb. 5 — suggests there isn’t much room for LPRs to go down further. The struggling economy means the central bank have to take bolder steps to ensure banks will pass along its easing.”

— Eric Zhu, economist

Read the full report here.

The PBOC has taken some steps to support the economy. Earlier this month, it unleashed 1 trillion yuan ($139 billion) of liquidity into the banking system via a trim to the reserve requirement ratio. It also lowered interest rates on relending funds provided to lenders to incentivize loans to agricultural and small firms. 

Banks also cut their deposit rates late last year, which helped ease pressure on profit margins. PBOC Governor Pan Gongsheng flagged the likelihood of a lower LPR during a press briefing last month, citing the lower relending and deposit rates. 

The hesitancy to reduce policy loan rates may also reflect concerns about creating too wide of a divergence with the Federal Reserve, which has yet to start lowering its own interest rates as US inflation remains hot. 

Still, economists pointed to China’s ongoing issues with deflationary pressures as reason to consider more rate cuts.

“There is a gap between the current inflation level and the target,” said Ming Ming, chief economist at Citic Securities Co., who said to “watch for a rate cut” next quarter.

--With assistance from Iris Ouyang, Qizi Sun, Shikhar Balwani and Shulun Huang.

(Adds context on developer stock trading.)

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