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China’s central bank supplied 14-day cash to its banking system for the first time in months on Monday and at a lower interest rate, signaling its intent to further ease monetary conditions.
Jiang Qiming | China News Service | Getty Images
China on Monday lowered its main benchmark lending rates by 25 basis points at the monthly fixing.
The one-year loan prime rate (LPR) has been cut to 3.1%, while the five-year LPR has been trimmed to 3.6%, the People’s Bank of China (PBOC) said.
The one-year LPR influences corporate loans and most household loans in China, while the five-year LPR serves as a benchmark for mortgage rates.
The move was expected. China’s central bank governor Pan Gongsheng had indicated on Friday during a forum held in Beijing that the loan prime benchmark rates would be lowered by 20 to 25 basis points.
During the forum, Pan also said that the amount of cash that banks need to have on hand, also known as the reserve requirement ratio or RRR, could be lowered by another 25 to 50 basis points by the end of the year, depending on the liquidity situation.
The seven-day reverse repurchase rate will be cut by 20 basis points, while the medium-term lending facility rate will be lowered by 30 basis points, Pan also highlighted.
While the loan prime rate cuts were expected, it does confirm that monetary stimulus is at least “occurring on a significant basis in China,” said Shane Oliver, head of investment strategy and chief economist at AMP. However, he noted that the cut alone is insufficient to lift the country’s economy, reiterating growing calls for more fiscal stimulus.
“The cost of money, the supply of money, is not the real issue in China. The real issue is a lack of demand, and that’s why I think fiscal stimulus is so important,” he added.
Despite recent cuts, the real interest rate in China is still “too high,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “I expect more rate cuts next year as the Fed rate declines.”
Last month, China’s central bank trimmed its reserve requirement ratio 50 basis points. The move came as the PBOC released a blitz of support measures aimed at shoring up the world’s second largest economy, which is facing a prolonged property crisis and weak consumer sentiment.
China surprised the markets by shaving its major short and long term lending rates in July.
Last week, China reported slightly better than expected third-quarter GDP growth of 4.6% year-on-year. Additional data released on Friday, including retail sales and industrial production for September, had also beat expectations, a hopeful sign for the country’s flagging economy.
—CNBC’s Evelyn Cheng contributed to this report.
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