China set to take ‘key step’ to boosting credit demand with rate cuts expected amid coronavirus, property slumps

China’s one-year loan prime rate (LPR) – the de facto benchmark lending rate for banks – is expected to be cut by 10 basis points from 3.7 to 3.6 per cent

The five-year LPR, a reference for mortgage costs, could be cut by as much as 15 points from its current level of 4.45 per cent

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China reported troubling data earlier this week that indicated the economic slowdown is deepening as Covid outbreaks spread and a property crisis worsens. Photo: AFP

Published: 10:02am, 19 Aug 2022

Chinese banks are likely to trim their benchmark loan prime rates on Monday for the first time in months to help spur borrowing demand and reverse a sharp slump in consumer and business sentiment.

The one-year loan prime rate (LPR) – the de facto benchmark lending rate for banks – is expected to be cut by 10 basis points from 3.7 to 3.6 per cent, according to all 16 economists polled by Bloomberg. That would represent the first reduction since January.

Economists are more divided on the five-year LPR, a reference for mortgage costs. The median estimate is for a 10-basis point reduction from 4.45 to 4.35 per cent, although six of the 16 economists expect that rate to be trimmed by an even larger margin of 15 points. Lenders last reduced the long-term loan rate in May by a record 15 basis points.

The LPRs are based on interest rates that 18 banks offer their best customers and are quoted as a spread over the central bank’s rate on its one-year policy loans, known as the medium-term lending facility (MLF).

To be sure, rate cuts alone are not enough to solve the issue of weak credit demand

Larry Hu

The People’s Bank of China unexpectedly cut the MLF rate by 10 basis points on Monday, which should prompt lenders to ease their loan rates too.

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