China cuts benchmark lending rate to prop up economy

Cornelia Mascio
Febbraio 21, 2020

Interest rates of the loans were generally 0.5 to 0.75 percentage points lower than the prevailing rates, said the association. Prior to the decision, according to a survey of traders and analysts conducted by Reuters on Wednesday, it was expected that the PBoC would cut its benchmark interest rate.

This follows a cut to the medium-term lending that was made on Monday as policymakers sought to ease the drag to the businesses from a coronavirus outbreak that has severely disrupted activity. Investors are betting the authorities will roll out more monetary easing and fiscal stimulus in the near term to help smaller businesses that are struggling to tide over the crisis.

Mayank Mishra, macro strategist at Standard Chartered Bank in Singapore, told Reuters that the LPR cut may not be enough to overcome the economic impact of the virus. "They do not want fuel expectations that they will be easing aggressively", Mishra said.

Benchmark lending rates were cut on Thursday, as was widely expected.

The PBOC announced a plan to reform the LPR mechanism in August 2019, to better reflect market changes in a bid to guide borrowing costs lower to support the real economy.

Growth in the world's second-biggest economy slowed to 6.1% in 2019, the weakest pace since 1990, as demand at home and overseas slowed in part due to the Sino-U.S. trade war.

But economists polled by Reuters forecast that Chinese growth will slump to 4.5% in the first quarter, from 6% in the previous three months. Some analysts warn of even lower growth closer to the 3% mark, underlining the widespread business disruption caused by the virus.

Total social financing, an aggregated total credit that includes both banks and non-bank lending, stood at CNY5.07 trillion in January, a new monthly high, thanks to a rise in new bank loans and local government bonds issuance.

The LPR, released on the 20th of every month, is based on rates of the central bank´s open market operations, especially medium-term lending facility rates.

Julian Evans-Pritchard of Capital Economics said the rate cut would "help companies weather the damage from the coronavirus at the margins".

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