China’s central bank on Monday provided 14 days of cash to the banking system at lower interest rates for the first time in months, signaling its intention to further ease monetary conditions.
Jiang Qiming|China News Service|Getty Images
China on Monday cut its main benchmark lending rate by 25 basis points on a monthly basis.
The People’s Bank of China said that the one-year loan prime rate (LPR) has been reduced to 3.1%, and the five-year loan prime rate (LPR) has been reduced to 3.6%.
The one-year LPR affects corporate loans and most household loans in China, while the five-year LPR is the benchmark for mortgage rates.
The move comes as no surprise. President of the People’s Bank of China Pan Gongsheng said at a forum in Beijing on Friday The preferential loan base interest rate will be revised down by 20 to 25 basis points.
Ban Ki-moon also said at the forum that the bank deposit reserve ratio may be reduced by another 25 to 50 basis points before the end of the year, depending on the bank deposit reserve ratio.
Pan also emphasized that the 7-day reverse repo rate will be cut by 20 basis points and the medium-term lending facility rate will be cut by 30 basis points.
Shane Oliver, AMP’s head of investment strategy and chief economist, said while the cut in the prime lending rate was expected, it did confirm that monetary stimulus was at least “happening massively in China”. However, he noted that spending cuts alone would not be enough to boost the country’s economy and reiterated growing calls for more fiscal stimulus.
“Money costs, money supply are not the real problem in China. The real problem is lack of demand, which is why I think fiscal stimulus is so important,” he added.
Zhang Zhiwei, president and chief economist of Pindian Asset Management, said China’s real interest rates remain “too high” despite recent rate cuts. “With the Fed rates coming down, I expect more rate cuts next year.”
Last month, the People’s Bank of China lowered the deposit reserve ratio by 50 basis points. The move comes as the People’s Bank of China unveiled a raft of support measures aimed at shoring up the world’s second-largest economy, which is facing a protracted housing crisis and weak consumer confidence.
China surprised markets in July by cutting key short- and long-term lending rates.
Last week, China announced that its third-quarter GDP grew by 4.6% annually, slightly better than expected. Other data released on Friday, including retail sales and industrial production for September, also beat expectations, a hopeful sign for the country’s sluggish economy.
—CNBC’s Evelyn Cheng contributed to this report.
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