China cuts loan prime rate by less than expected, 5-yr rate unchanged

  • Investing.com
  • Economy News
China cuts loan prime rate by less than expected, 5-yr rate unchanged

Investing.com -- The People’s Bank of China cut its one-year loan prime rate by a smaller-than-expected margin on Monday, while five-year rates were left unchanged as the country grapples with slowing economic activity. 

The PBOC cut its one-year loan prime rate (LPR) to 3.45% from 3.55%, while the five-year LPR , which is used to determine mortgage rates, was left unchanged at 4.20%. Analysts were expecting a 15 basis point (bps) cut for each rate. 

A cut in the LPR was largely telegraphed by the central bank, given that it had trimmed medium and short-term lending rates by 15 bps each last week amid growing concerns over the Chinese economy. The LPR is decided by the central bank based on considerations taken from 18 designated commercial banks, and is used as a benchmark for borrowing conditions in the country. 

Monday’s disappointing cut comes as the PBOC also struggles to maintain a balance between supporting the economy and stemming further weakness in the yuan , which is dented by lower interest rates. The Chinese currency recently sank to its lowest level in over nine months.

The PBOC has repeatedly vowed to keep releasing more liquidity for the economy, as it struggles with slowing business activity and an increasingly deflationary outlook. A string of economic readings for July presented a bleak picture of the Chinese economy after it barely grew in the second quarter.

But while the interest rate cuts were welcomed by markets, investors have increasingly called on the government to roll out more targeted, fiscally supportive measures to support growth. 

This also comes amid a growing crisis in China’s real estate sector, with majors such as Country Garden Holdings (HK: 2007 ) now facing a potential default. The PBOC was expected to cut the five-year LPR as a means to support the real estate sector by further loosening lending conditions.

Analysts have also downplayed expectations of fiscal support from the Chinese government, with Fitch Ratings recently stating that such a move could threaten China’s sovereign rating. Fitch also expects Beijing to largely hold back fiscal stimulus measures.

While Chinese officials have promised more measures to support domestic spending, they have offered scant details on how such support will be released.

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