Sunday, December 10, 2023

China lowers its benchmark interest rate to 3.45%, a smaller cut than expected

He People’s Bank of China (BPC, central bank) announced today that it will lower its reference rate for loans by ten basis points, from 3.55% to 3.45%thus undertaking the second reduction this year due to concerns about a less lustrous than expected economic recovery.

The reference rate for credits (LPR, acronym in English) to one year had registered its last variation last June, when the central bank cut it from 3.65%.

This indicator, established as a reference for interest rates in 2019, is used to set the price of new loans -generally, for companies- and of variable interest that are pending return.

Its calculation is carried out from the contributions to the prices of a series of banks – including small lenders that tend to have higher costs of financing and greater exposure to delinquent credits-, and its objective is to lower the costs of borrowing and support the “real economy”.

However, the LPR for five years or more -the reference for mortgage loans- did not register changes, remaining at 4.2%.

The decision announced today is less aggressive than expected by analysts, who anticipated a drop in 15 basis points for both the one-year LPR and the five-year LPR.

Julian Evans-Pritchard and Zichun Huang of Capital Economics called it “disappointing” the movement of the central bank, since they expected a more drastic reduction after the biggest cut -15 basis points- since April 2020 to the medium term loan services (MLF), the BPC’s main tool for financing banks and usually a guide for LPRs.

“The disappointing announcement of the LPRs reinforces our view that the BPC is unlikely to adopt the cuts much higher rates than would be needed to revive credit demand,” the experts explained, adding that hopes of a stimulus-based rebound now depend on the possibility of further fiscal support.

“This suggests that the PBOC is trying to balance its desire to boost the economic activity and the concerns of the banks, which are suffering due to the reduction in interest margins and their lower capacity to generate profits”, pointed out Evans-Pritchard and Huang, who expect another 20 basis points of rate cuts over the course of what left of 2023.

After a promising start to the year, the post-pandemic recovery of the Chinese economy shows signs of slowing down, growing less than expected in the second quarter (+6.3% year-on-year).

Low national and international demand, risks of deflation and insufficient stimuli, together with a real estate crisis that has not bottomed out and a lack of confidence within the private sector are the main causes that analysts use to explain the problems of the second largest world economy.


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