China Cuts Loan Prime Rates To Revive Housing Market

China reduced its benchmark lending rates to reduce the interest burden of existing loans, and in turn to ease the pressure on the housing market and the faltering economy.

The People’s Bank of China lowered its five-year loan prime rate, or LPR, the benchmark for mortgage rates, by 15 basis points to 4.30 percent from 4.45 percent.

The bank had last lowered the 5-year LPR by 15 basis points in May and five basis points in January.

The one-year loan prime rate was reduced by 5 basis points to 3.65 percent from 3.70 percent, which was the first reduction since January.

The LPR is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This lending rate replaced the central bank’s traditional benchmark lending rate in August 2019.

Earlier this month, the central bank had cut the one-year medium-term lending facility by 10 basis points to 2.75 percent and the seven-day reverse repo rate was lowered to 2.0 percent from 2.10 percent.

The impression from all the PBoC’s recent announcements is that the policy is being eased but not dramatically, Sheana Yue, an economist at Capital Economics said.

The economist anticipates two more 10 basis points cuts to the PBoC policy rates over the remainder of this year and continue to forecast a RRR cut next quarter. The Bank is also likely to make use of other measures to encourage banks to lower lending rates, Yue added.

Although further easing measures are on the cards, credit growth is proving less responsive to policy loosening than in the past, Yue said. Any additional support will fall short of driving a strong recovery.

In the second quarter, the economy had expanded only 0.4 percent due to the strict zero-COVID policy, casting doubt over Beijing’s ability to achieve its growth target of around 5.5 percent.

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