China cuts policy rate for first time in 20 months
(CNN) – China’s central bank has cut its main interest rate for the first time in 20 months, as authorities step up efforts to stimulate an economy that has been hit by pandemic-related restrictions, a housing crisis and a crackdown unprecedented against private companies.
The People’s Bank of China on Monday lowered its one-year prime lending rate (LPR) by 5 basis points to 3.8%. The LPR is the rate at which commercial banks lend to their best customers and it serves as the benchmark rate for other loans.
Although Monday’s rate cut is small, it is the first such measure since April 2020, when China cut rates to boost its economy hit by Covid, which had just contracted for the first time. in over 40 years.
“This drop reinforces our view that authorities are increasingly open to lower interest rates amid economic headwinds,” Zhaopeng Xing, senior Chinese strategist at ANZ, said Monday in a research note. .
A lower borrowing rate can help lower borrowing costs for households and businesses and, in turn, encourage consumer spending and investment.
Unlike the West, Beijing had refrained from flooding the economy with stimulus packages during the pandemic, instead focusing on offering targeted support to small businesses.
China was the only major economy to record growth in 2020, but this year the country’s expansion was affected by several factors, forcing it to consider ways to provide support even as other major central banks did. are withdrawing their stimulus measures and raising their interest rates to fight inflation.
An energy shortage has hampered industrial production for much of this year, as the country struggled to balance its electricity needs with its efforts to tackle the climate crisis.
Government data last week showed house prices fell for a third consecutive month in November, a sign that the ongoing housing crisis continues to worsen.
Retail sales have also struggled, suggesting that coronavirus outbreaks and the government’s “zero-Covid” approach of locking down areas where infections break out are wreaking havoc on the economy.
Key Chinese leaders have already expressed concerns about the growth prospects. At a key economic meeting earlier this month, they said “securing stability” would be a top priority for the coming year. This is a huge fulcrum from last year’s meeting, when “stemming the disorderly expansion of capital” prevailed throughout the day.
To counter rising economic risks, policymakers pledged at this year’s meeting to adopt âupfrontâ policies, including keeping monetary policy âflexibleâ.
Last week, the central bank lowered the reserve requirement ratio of most banks by half a percentage point. The move, which cuts the amount of money banks must keep in reserve, is expected to free some 1.2 trillion yuan ($ 188 billion) for loans to businesses and households, according to the PBOC.
Monday’s LPR cut is expected to reduce “the interest burden” by about 80 billion yuan ($ 12.6 billion) per year, starting next year, for businesses and households, Xing estimated. of the ANZ.
“The PBOC wants to offer more easing as it is increasingly concerned about economic dynamics,” Societe Generale analysts said in a research note on Monday.
“There should no longer be any doubt by now that a serious (albeit still small) easing cycle is unfolding.”
The world’s second-largest economy could grow at its slowest pace since 1990 next year, economists say.
This story first appeared on CNN.com, “China lowers key interest rate for first time in 20 months.”