China cuts interest rate slightly in latest fine-tuning of economic stimulus
- The People’s Bank of China cut its one-year and five-year Loan Prime Rate by 5 basis points on Wednesday, as expected
- China’s central bank ordered state-owned banks to use the new rate to lower lending costs to help shore up the slowing economy
China on Wednesday made a slight cut to a key interest rate, the latest in a series of small, incremental steps to loosen monetary policy and support economic growth.
Beijing has so far avoided large policy measures to counter an ongoing economic slowdown, but has instead taken a series of small steps to fine-tune policy, indicating it believes growth could bottom out next year.
The People’s Bank of China (PBOC), the country’s central bank, cut its one-year Loan Prime Rate (LPR) by 5 basis points on Wednesday and ordered state-owned lenders to align their loan rates to that benchmark, a move that was widely expected. The November loan prime rate, the average of the rate that 18 selected commercial banks charge their best customers, was set at 4.15 per cent for one-year maturities, down from 4.20 per cent a month earlier, the PBOC said.
The five-year prime rate, generally used as a reference rate for new mortgage loans, was lowered by 5 basis points to 4.80 per cent, the first time the rate on this maturity has been cut since the new LPR regime was introduced in August.
The cut in the LPR was a direct result of the central bank lowering the rates that banks have to pay to borrow money. The PBOC cut the rate on its one-year medium-term lending facility, (MLF), which is uses to provide funding to banks to lower cost, by 5 basis points in early November as well as cutting the rate on its 7-day reserve repo, which it uses to add liquidity to the banking system, by 5 basis points on Monday.
It is unclear whether slightly lower interest rates will spur more bank lending to support the economy.
At a credit analysis conference it sponsored on Tuesday, the central bank ordered lenders to better serve the real economy and strengthen countercyclical adjustments after new lending in October fell to the lowest level this year.
“[We] must convince financial institutions to change their loan pricing mentality, and truly align them to the Loan Prime Rate to promote the decline of actual market lending rates,” the bank’s governor Yi Gang told the heads of six major state-owned banks attending the conference.
“[We] will also push forward with raising banks’ capital to increase their lending capacity,” he was quoted in an online statement as saying.
With economic growth still slowing and unlikely to bottom out in the near-term, we think the PBOC will take further steps to shore up lending
In its third quarter monetary policy report released on Saturday, the central bank made clear that it will firmly oppose “all-out stimulus” and proactively defend “normal monetary policy”, rather than follow the major monetary policy easing steps taken this year by the US Federal Reserve and the European Central Bank.
Still, calls for a much looser Chinese monetary policy stance persist.
Julian Evans-Pritchard, a senior China economist at Capital Economics, said that Wednesday’s PBOC interest rate reduction was marginal but another sign that the central bank is starting to take a more proactive approach to nudging down borrowing costs.
“With economic growth still slowing and unlikely to bottom out in the near-term, we think the PBOC will take further steps to shore up lending,” Evans-Pritchard said in a note, adding he expected the central bank to cut interest rates by 70 basis points by the middle of next year.
Next year’s economic policy direction will be officially set at the closed-door Central Economic Work Conference, which will be attended by top leaders, economic officials and provincial governors in December. The government’s growth target for next year will be revealed to the public during the government work report in March 2020.
