China reduced its benchmark lending rate for the second straight month as the economic growth weakened at the end of 2021.
The one-year loan prime rate was reduced to 3.70 percent from 3.80 percent. This was the second consecutive reduction after a 5 basis point cut in December.
The five-year LPR, the benchmark for mortgage rates, was lowered to 4.60 percent from 4.65 percent, which was the first cut since April 2020.
Mortgages will now be slightly cheaper which should help shore up housing demand, Julian Evans-Pritchard and Sheana Yue, economists at Capital Economics, said.
Economists expect additional easing to follow in the coming months, including measures to push down deposit rates. But policymakers still appear reluctant to engineer a sharp pick-up in credit growth, they added.
The loan prime rate 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.
Early this week, the People’s Bank of China had cut the one-year medium lending facility rate to 2.85 percent from 2.95 percent and the 7-day reverse repo rate to 2.10 percent from 2.20 percent.
Iris Pang, an economist at ING said all these actions are proactive to support economic growth. The question remains whether banks will respond by increasing lending
The current credit environment is not improving. She said the uncertainty of credit from real estate developers has led to a general atmosphere that credit quality is worse now than in 2020. Banks will be picky about who they lend to and may require more collateral, Pang noted.
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