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

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The move was the second cut to the lending benchmark rate this year, and the latest reduction in one of China’s key lending rates. Photo: AFP

Published: 10:12am, 20 Apr 2020Updated: 12:19pm, 20 Apr 2020

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.

The move was the second cut to the lending benchmark rate this year, and the latest reduction in one of China’s key lending rates. Most new and outstanding loans are based on the LPR, while the five-year rate influences the pricing of mortgages.

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

Martin Rasmussen

“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.”

Data on Friday showed the Chinese economy shrank 6.8 per cent in the first quarter from a year earlier as the virus and tough containment measures shut down factories and shops and put millions out of work.

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

Jacqueline Rong