Surprise cut
China’s central bank has announced a surprise cut in its key lending rates as the country’s economic recovery loses steam amid as domestic demand remains weak.
The PBOC trimmed the interest rate on 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans from 2.65% to 2.50%.
The People’s Bank of China (PBOC) said on Monday 14th August 2023 that it would lower the one-year loan prime rate (LPR) by 10 basis points from 3.55% to 3.45%, and the five-year LPR by 10 basis points from 4.2% to 4.1%. The LPRs are benchmark rates that reflect the cost of borrowing for banks and businesses.
Easing domestic contraints
The rate cuts are aimed at easing the financial constraints on households and businesses to boost their financing demand and stimulating economic growth, which slowed to 5.2% year-on-year in the second quarter, down from 6.8% in the first quarter.
Analysts said the rate cuts also indicated a shift in China’s monetary policy stance from neutral to moderately easing, as the PBOC faces increasing pressure to support the economy amid rising deflationary risks, falling producer and consumer prices, and subdued real estate activity.
The PBOC reportedly said it would continue to implement a prudent monetary policy and maintain reasonable and sufficient liquidity in the market.