At the monthly fixing on Monday, China cut its primary benchmark lending rates by 25 basis points.
The People’s Bank of China (PBOC) announced that the one-year loan prime rate (LPR) has been lowered to 3.1% and the five-year LPR to 3.6%.
In China, the one-year LPR affects corporate loans as well as the majority of family loans; the five-year LPR is used as the standard for mortgage rates.
It was a predictable move. Pan Gongsheng, the governor of China’s central bank, hinted at a 20–25 basis point reduction in loan prime benchmark rates on Friday at a meeting in Beijing.
Depending on the liquidity situation, Pan also stated during the forum that the reserve requirement ratio, or RRR, which measures the amount of cash that banks must maintain on hand, may be decreased by an additional 25 to 50 basis points by the end of the year.
Pan also announced a 30 basis point reduction in the medium-term loan facility rate and a 20 basis point reduction in the seven-day reverse repurchase rate.
Although the loan prime rate reductions were anticipated, monetary stimulus is at least “occurring on a significant basis in China,” according to Shane Oliver, AMP’s senior economist and head of investment strategy. He did, however, reiterate the rising need for further fiscal stimulus, noting that the cut alone will not be enough to improve the nation’s economy.
“The true problem in China is not the availability or cost of money. The lack of demand is the true problem, which is why fiscal stimulus is crucial, the speaker continued.
The actual interest rate in China is still “too high,” according to Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, even with the recent reductions. “I expect more rate cuts next year as the Fed rate declines.”
The reserve requirement ratio was lowered by 50 basis points by the Chinese central bank last month. The action was taken in tandem with the PBOC’s introduction of a flurry of support policies meant to boost the second-biggest economy in the world, which is struggling with a protracted real estate crisis and low consumer confidence.
China shocked the financial world in July by lowering its key short- and long-term lending rates.
China said this week that its third-quarter GDP grew by 4.6% annually, which was slightly better than anticipated. Retail sales and industrial production for September, two other pieces of data that were made public on Friday, exceeded forecasts as well, which is encouraging for the nation’s faltering economy.
