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.
Source credit: https://www.scmp.com/economy/china-economy/article/3160350/china-cuts-benchmark-loan-rate-first-time-almost-2-years-amid