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China unveiled an unexpected interest rate cut days after a top Communist Party policy meeting in a sign of government efforts to boost lagging momentum in the world’s second-largest economy.
The People’s Bank of China said on Monday that the one-year benchmark interest rate, widely used as a benchmark for corporate loans, would be cut by 0.1 percentage point to 3.35 percent, the first such cut since August last year.
The five-year equivalent, which affects mortgage prices, also fell 0.1 percentage point to 3.85 percent for the first time since February.
The cut came after China’s central bank cut the so-called reverse repo rate, the seven-day rate used to price short-term loans, by 0.1 percentage point to 1.7 percent. The PBoC said the move was to “strengthen counter-cyclical adjustments to better support the real economy”.
The PBoC also cut rates on the so-called standing lending facility, which are loans to banks that need short-term cash, by 0.1 percentage point across all maturities on Monday.
China has repeatedly cut its main lending rates in recent years amid a prolonged slowdown in property growth and weak domestic consumption. Policymakers have come under pressure to take greater steps to boost investor and consumer confidence.
Official data last week showed the economy expanded 4.7 percent in the second quarter, missing forecasts, while metrics in the real estate sector worsened.
“This quantitatively modest but symbolically significant set of actions signals the government’s willingness to finally use macroeconomic stimulus to boost faltering economic activity,” said Eswar Prasad, a professor of economics at Cornell University.
The rate cut came on the heels of the Chinese Communist Party’s Third Plenary Session, a closely watched closed-door meeting where the party’s elite Central Committee sets its policy direction. At this year’s event, which ended Thursday, officials signaled concerns about the economy and pledged more support.
Beijing has allowed state-owned enterprises to buy unsold apartments in recent months to deal with a slowdown in property growth. But there are few signs of improvement in the sector, with new home prices falling 4.5 percent last month, the most in almost a decade.
China’s rate-setting framework has evolved considerably in recent years, with rates such as the LPR linked to the medium-term credit facility set by the PBoC, which affects the liquidity of the banking sector. Mr. Gongsheng, the central bank governor, hinted at a greater role for the repo rate in setting future policy in June.
Lynn Song, chief economist for greater China at ING, said Monday’s cut “could be seen as the PBoC signaling the seven-day reverse repo rate’s new status as the primary policy rate”, depending on whether other benchmarks were cut in the coming period rates. weeks.
Analysts have warned that the impact of such cuts is likely to be modest. Prasad said the LPR cut was “unlikely to be effective” unless it was “accompanied by fiscal stimulus and broader policy reforms to revive faltering private sector confidence”.
“If the PBoC is serious about monetary stimulus, it should cut rates much more substantially,” said Julian Evans-Pritchard, head of China at Capital Economics. “However, efforts to stabilize long-term yields and keep currency devaluation under control mean that a large-scale rate cut still appears unlikely.”
China’s 10-year government bond yield fell to 2.24 percent on Monday after the cut, while the renminbi weakened to a near two-week low of 7.28 per dollar.
More news from Joe Leahy in Beijing