China’s central bank cut its benchmark interest rate for the second consecutive month, as expected, following a cut in the rate of its medium-term loans earlier this week and yesterday’s pledge by its deputy governor the central bank would open its “monetary tool box” wider to avoid a collapse in credit.
The People’s Bank of China (PBOC) cut its one-year Loan Prime Rate (LPR) by a further 10 basis points to 3.70 percent and has now cut it 15 points in two months following a 5 point cut in December.
It is PBOC’s 7th cut in LPR since it was introduced as the benchmark rate in August 2019, with the rate now having been cut a total of 65 basis points, including two cuts in response to the COVID-19 pandemic in February and April 2020.
PBOC today also cut LPR on loans of 5 years or more – which impacts the cost of mortgages – by 5 basis points to 4.60 percent, the first cut since April 2020.

     The cut in 1-year LPR in December 2021 was part of PBOC’s four moves last year to ease its monetary policy stance as authorities seek to carefully deflate the property market without triggering a credit crunch amid slower economic growth and higher inflation.

     In July and December last year PBOC cut the reserve requirement ratio for most financial institutions by a total of 1 percentage point and also issued 85.5 billion in low cost loans to encourage financial institutions to boost their support from small enterprises and accelerate the creation of a green financial system.

     Expectations about the cut in LPR were fueled earlier this week when PBOC on Jan. 16 cut the interest rate on 700 billion yuan of one-year medium-term lending facility (MLF) loans by 10 basis points to 2.85 percent, its first cut since April 2020.

      LPR is calculated by the major financial institutions as a spread to MLF and reflects the cost of credit by 18 banks to their best customers.

      In addition to the cut in MLF, PBOC on Jan. 16 also cut the borrowing cost of 7-day reverse repos by 10 basis points to 2.10 percent when offering 100 billion yuan in reverse repos.

     On Jan. 18 PBOC Deputy Governor Liu Guoqiang told a press briefing the central bank would roll out more policies to stabilize economic growth, front-load actions and make pre-emotive moves as it seeks to spur the economy and credit.

     In the fourth quarter of last year China’s gross domestic product slowed for the third quarter in a row to an annual rise of 4.0 percent from 4.9 percent in the third quarter, 7.9 percent in the second quarter and 18.3 percent in the first quarter.

     For 2021 China’s GDP grew 8.1 percent.

     Inflation in China decelerated to 1.5 percent in December from 2.3 percent in November while producer prices decelerated to growth of 10.3 percent from 12.9 percent, with analysts saying the slowdown in inflationary pressures would give PBOC space to ease policy further.

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