China Cuts Main Interest Rate to Boost Economy

BEIJING, June 20 (TiPost)——The People’s Bank of China (PBOC), China’s central bank, cut two key lending rates on Tuesday for the first time in 10 months to boost economic growth.

The central bank authorized the National Interbank Funding Center to announce that the 1-year loan prime rate (LPR) was reduced to 3.55% and the 5-year LPR to 4.2%, both down 10 basis points from the previous readings of 3.65% and 4.3%, respectively. The rate cuts came in as the first adjustments in LPR since August 2022.

The bid rate for the medium-term lending facility (MLF), which is the basis for the LPR offer, fell 10 basis points to 2.65% this month from the previous month. During the PBOC’s 2 billion yuan ($278.68 million) reverse repo operation last Tuesday, the bid rate also dropped 10 basis points to 1.9%. The PBOC also announced on the same day the standing lending facility rates for the overnight, 7-day, and 1-month periods, with each rate dropping 10 basis points.

Zeng Gang, director of the Shanghai Institute for Finance and Development, believes that the decline in policy interest rates has led to a drop in the two varieties of LPR quotes this month, which will effectively drive down real loan interest rates and reduce financing costs, thereby stimulating credit demand and enhancing the momentum of consumption and investment growth.

Industry insiders pointed out that this is the first interest rate cut in the first half of this year, implying a prologue of a new round of economic boost.

“The cut is not a surprise. It is in line with the spirit of the recent State Council executive meeting. The downward adjustment for the cost of medium and long-term loans also means that the government will continue to make efforts to reduce costs of the real economy,” Yan Yuejin said.

Moreover, as home purchase loans are long-term borrowing, the reduction of over-five-year LPR means that it will directly reduce the cost of home purchase and loan repayment.

“From the perspective of real estate loans, this interest rate cut will naturally help reduce the cost of mortgage loans，” said Yan. He also pointed out that with the reduction of LPR rates, major banks are expected to cut mortgage rates in the following two weeks. Their mortgage rates will generally drop by 10 basis points, which also means the start of a new round of relaxed mortgage policies.

Industry insiders also noted that the decline in over-five-year LPR will not only help the property market to rebound but also help stimulate consumption. The real estate industry, which has many upstream and downstream chains and is closely related to the balance sheet of residents, is still important to stabilize growth. In the current environment where the real estate market is still sluggish, bringing down LPR to drive mortgage rates down is becoming an imperative part of reversing market expectations and promoting the stable and healthy development of the real estate market. At the same time, the reduced burden on home buyers will also help increase their willingness to consume and invest, leading to growing domestic demand and faster economic rebound.

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