The People's Bank of China, the country's central bank, may need to mull new measures to ease the funding costs of commercial banks as the latter's profit margins may be further squeezed by cuts to their interest rates on outstanding mortgages, experts said on Wednesday.

Their views factored in the PBOC's guidance on Tuesday that banks should adjust interest rates on existing mortgages in an orderly manner. Experts said the PBOC announcement appears to be a significant move to stabilize the housing market and the broader economy, which can alleviate the debt burden of households and boost their consumption.

Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution, said there is large scope for commercial banks to reduce the interest rates on existing mortgages, perhaps by about 50 basis points on average nationwide.

A narrowing gap between interest rates on existing and new mortgages will, in turn, reduce early mortgage repayments and create more room for the interest rates on new mortgages to fall, which will further shore up homebuying demand, Yan said.

Reducing mortgage rates, however, could further squeeze commercial banks' profit margins that are already at a low level after continuous declines in recent years, said Lou Feipeng, a researcher at Postal Savings Bank of China.

Lou said the central bank can alleviate the pressure on commercial banks' profits by launching structural monetary policy tools to drive the cost of banks' liabilities lower.

Liabilities of a commercial bank are what a bank owes, mainly consisting of deposits. A bank earns profits by lending at an interest rate higher than what it pays on liabilities.

Echoing Lou's view, analysts at China International Capital Corp Ltd said in a report that it is necessary to reduce the interest rates on deposits or launch structural monetary tools to counter the negative impact of lower mortgage rates on bank profits.

The CICC report estimates that if interest rates on half of existing mortgages are reduced by 70 basis points, commercial banks' net profit for 2023 may decrease by 4 percent, with a bigger impact on large State-owned banks with considerable outstanding mortgages.

Still, Lou said that the impact of lower mortgage rates on bank profits "cannot be ignored but remains limited", as falling interest rates on outstanding mortgages can mitigate early mortgage repayments and reduce banks' losses of interest income.

On Tuesday, the PBOC also pledged to tamp down interest rates and down payment ratios for new mortgages and promote a decline in corporate and household financing costs, after the central bank and the State Administration of Foreign Exchange held a meeting to organize their work schedule for the second half of the year.

As the PBOC's first work conference after Pan Gongsheng, head of SAFE, was appointed the central bank governor last week, the meeting stressed the need for optimizing foreign exchange policies.

Efforts were urged to keep a close eye on cross-border capital flows, strengthen macroprudential regulation and manage expectations, in order to keep the yuan exchange rate generally stable at a reasonable and balanced level, said a PBOC statement after the meeting.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the depreciation pressure on the renminbi against the US dollar is likely to ease as the US monetary tightening appears to be nearing the end of its current round while the possibility of a US economic recession looms.

Reflecting souring confidence in dollar-denominated assets, Fitch Ratings has cut the US debt rating from AAA to AA+, citing worsening fiscal conditions and governance.

By contrast, China's economic momentum may strengthen in the third quarter as growth stabilization policy efforts ramp up, underpinning the renminbi, Wang said.