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China cuts benchmark LPR first time since 2020 amid economic strain

China cuts benchmark LPR first time since 2020 amid economic strain

Chinese central bank, The People’s Bank of China (PBOC), has reportedly cut its benchmark lending rate for the first in almost 2 years, in an attempt to boost the pandemic-hit economy that is currently going through a real-estate slump.

The one-year loan prime rate (LPR), upon which new and outstanding loans are based, has been cut from 3.85% to 3.8%, while the five-year LPR for mortgages will remain at 4.65% according to the PBOC.

The rate, considered as China’s de facto benchmark funding cost since 2019, has been decided by a group of eighteen banks and was reported as a spread over the interest rate offered by the PBOC’s medium-term lending facility.

The last time the LPR was changed was in April of 2020 when it was cut from 4.05% to 3.85%.

Last week, the PBOC had decided to lower the bank’s reserve requirement ratio, which had freed up to ¥1.2 trillion ($188 billion) worth of long-term funds.

Earlier, analysts from American investment banking firm, Goldman Sachs, had predicted that the central bank might reduce its one-year LPR rate by 5 points.

A well-known Chinese think tank had also stated that the country should lower its interest rates and boost investment in infrastructure, to make sure that the economy grows by at least 5% next year.

It has been speculated that China’s year-on-year economic growth will drop below 4% during the fourth quarter of 2021, a significant drop from the first quarter when it had recorded an 18.3% rise. The sudden decline raised concerns for a hard landing in the country's economy, prompting more supportive measures by the authorities. 

Mark Williams, Chief Asia Economist at the London-based economic research company, Capital Economics, has described the cut as a modest easing step and stated that it will help towards outstanding floating rate business loans so that new fixed-rate borrowers can offer cheaper loans.

Williams further added that the firm is expecting a further 45-basis points of cuts in the one-year LPR next year, as well as a cut in the five-year LPR to make mortgages slightly cheaper.

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