Coronavirus: China’s benchmark loan rate cut another sign authorities are ‘serious about monetary easing’
- The one-year loan prime rate (LPR) was lowered by 20 basis points to 3.85 per cent, while the five-year LPR was cut by 10 basis points to 4.65 per cent
- Last week, it was confirmed China’s economy shrank 6.8 per cent in the first quarter from a year earlier
China cut its benchmark lending rate as expected on Monday to reduce borrowing costs for companies and prop up the coronavirus-hit economy, after it contracted for the first time in decades.
The one-year loan prime rate (LPR) was lowered by 20 basis points to 3.85 per cent from 4.05 per cent previously, while the five-year LPR was cut by 10 basis points to 4.65 per cent from 4.75 per cent.
All 52 participants in a Reuters survey had expected a reduction in the LPR at its monthly fixing. Most had forecast a 20 basis points cut in the one-year rate, but a more modest 5-10 basis points in the five-year as Beijing tries to keep a lid on property prices.
It is easy to dismiss such a small fall in borrowing costs as insignificant for struggling firms. But the [People’s Bank of China] has been easing monetary conditions through a range of other tools recently, too
“It is easy to dismiss such a small fall in borrowing costs as insignificant for struggling firms. But the [People’s Bank of China] has been easing monetary conditions through a range of other tools recently, too,” said Martin Rasmussen, China Economist at Capital Economics.
“The latest rate decline should be viewed as yet another sign that authorities have become serious about monetary easing. As employment conditions remain weak and external demand held back by lockdowns, we think the People’s Bank will take further steps to prop up activity.”
While the country is restarting its economic engines, analysts say activity could take months to return to pre-crisis levels, with the likelihood of a global recession adding to the pressure.
Given the fact that the economy is facing such big downward pressure, even if there’s no epidemic this year, we expect to see some reasonable countercyclical relaxation in the housing sector
“The asymmetric cut suggests that the authorities will stick to the tight housing policy. It will not be deemed as a tool to stimulate domestic demand, even at this difficult time,” said Xing Zhaopeng, markets economist at ANZ in Shanghai.
Jacqueline Rong, senior China economist at BNP Paribas in Beijing, said the marginal cuts to the five-year LPR could be interpreted as “countercyclical relaxation” in the housing sector.
“Undoubtedly, the property sector has been the biggest driver of the economy, contributing more than exports to broad economic growth. Given the fact that the economy is facing such big downward pressure, even if there’s no epidemic this year, we expect to see some reasonable countercyclical relaxation in the housing sector,” she said.
The cut to the lending benchmark rate had been expected after the PBOC lowered the interest rate on its MLF for financial institutions to the lowest on record last week. That gauge serves as the guide to the LPR. The interest rate on one-year MLF now stands at 2.95 per cent.
The PBOC has stepped up policy easing since the outbreak intensified in mid-January, while the government has announced a host of fiscal measures from cheap loans to tax cuts and special bonds to fund infrastructure projects.
But the Chinese central bank’s response to the crisis so far has been less aggressive than many of its global peers and more restrained than the massive stimulus it deployed during the global financial crisis.
Analysts believe more aggressive stimulus is unlikely at this point, however, given policymakers’ concerns about a rapid rise in debt and risks to the financial system.
“After that, the PBOC may need to rely more on [reserve requirement ratio] cuts than rate cuts. The PBOC may use [reserve requirement ratio] cuts more than rate cuts before September to delay its policy rates touching ultra-low levels,” said Iris Pang, Greater China economist at ING.
