Economy Apr 20

More cuts expected even after China lowers key lending rate

Second reduction this year aimed at absorbing economic impact of coronavirus pandemic

by Nadeem Xu
More cuts expected even after China lowers key lending rate
Cut in key lending rate is hoped to stimulate lending to epidemic-hit businesses.

(ATF) China’s central bank is likely to cut interest rates again even after lowering financing costs on Monday by the most since August.

Analysts said the People’s Bank of China (PBOC), which cut the benchmark one-year loan prime rate (LPR) by 0.2 percentage points, would be likely to act again as it seeks to cushion the economic blow of the pandemic.

Wen Bin, chief economist with China Minsheng Bank, said that to maintain help for the economy, China needs to continually lower market lending rates and the financing costs of corporate bonds. That would support a rebound of the real economy in the coming months.

On Monday the PBoC lowered the one-year loan prime rate (LPR), which reflects the lending rate that 18 banks offer to their best clients, to 3.85%, down from 4.05%. The LPR is effectively a benchmark for all loans.

The reduction was the second this year and follows data last week that showed the economy shrank for the first time since the country began opening up in the 1980s. GDP for the first quarter contracted 6.8%.

The five-year LPR, which is related to mortgage rates, dropped by 0.1 percentage point to 4.65% according to the central bank announcement. That led to expectations that China was seeking to loosen restrictions on its property sector, which until the coronavirus crisis was being controlled to prevent dangerous asset bubbles from developing.

Analysts said the move was in line with market expectations, and there is still policy room for further cuts to interest rates and reserve requirement ratios (RRR) – the buffers banks must reserve to protect them against shocks – to keep ample liquidity and support smaller companies.

The central bank has reduced the RRR regularly to release cash on banks’ books so that it can be leant to companies to grow their business after the epidemic forced the shuttering of China’s economy.

The PBOC cut the one-year interest rate of the medium-term lending facility last week to 2.95%, down from 3.15%. This rate was seen as the basis of the one-year LPR.