Chinese banks lower main lending rate

July 23, 2024 (MLN): Chinese banks cut their main benchmark lending rate for the first time since August 2023, ramping up support for economic growth following the PBOC’s rate reduction, as Bloomberg reported.

The one-year loan prime rate was reduced to 3.35% from 3.45% previously, according to a statement by the People’s Bank of China on Monday.

The five-year rate, a reference for mortgages, was lowered to 3.85% from 3.95%.

The moves followed the PBOC’s decision earlier Monday to trim a key short-term policy rate for the first time in almost a year, after growth disappointed in the second quarter with the economy growing at the weakest pace in five quarters.

Beijing in recent months put a higher priority on safeguarding the yuan exchange rate than on providing monetary stimulus.

The pressure on the currency is likely to persist until the US Federal Reserve starts to ease policy, a move expected in September that will result in a narrower rate differential with China.

The PBOC has for months held steady the interest rate on the one-year policy loans, even with China’s economic growth unexpectedly slowing last quarter as faltering consumer spending offsets an export boom.

Credit growth hit a fresh record low in June, reflecting subdued borrowing demand.

The central bank last week withdrew cash from the financial system for a fifth consecutive month via its medium-term lending facility, or MLF, while maintaining the interest rate on the one-year policy loans.

Still, speculation over a reduction to the LPRs has picked up in recent weeks as the PBOC signaled it’s shifting to a short-term rate to guide markets while downplaying the MLF as a policy benchmark.

That would open up the space for banks to adjust the LPRs even if the policy rate stays unchanged, according to analysts.

The LPRs are based on the interest rates that 20 banks offer their best customers. They are quoted as a spread over the central bank’s one-year policy rate.

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