SHANGHAI/SINGAPORE (Reuters) – The People’s Bank of China (PBOC) cut its one-year prime lending rate on Monday as authorities seek to boost demand for credit but surprised markets by keeping its five-year rate unchanged. amid concerns about the rapidly weakening yuan.
The one-year prime lending rate (LPR) was cut by ten basis points, to 3.45% from 3.55% previously, while the five-year rate was left at 4.20%.
A Reuters survey of 35 market watchers showed that all participants expected a cut in both rates. The 10 basis point reduction in the one-year rate is lower than the 15 basis point reduction expected by most specialists surveyed.
The majority of new loans and outstanding loans in China are based on the one-year interest rate. The five-year rate influences the rate of mortgages. China cut both rates in June to stimulate the economy.
The recovery of the world’s second-largest economy from the COVID-19 pandemic is proving difficult due to the worsening housing crisis, weak consumer spending and collapsing credit growth, which argues in favor of a reinforcement of stimulus measures on the part of the authorities.
However, analysts believe that Beijing has limited room for monetary easing due to the downward pressure on the yuan. A widening of yield spreads between China and other major economies could trigger a crash in the yuan and capital flight.
“China has likely limited the size and scope of rate cuts because it’s worried about downward pressures on the yuan,” said Masayuki Kichikawa, macro strategist at Sumitomo Mitsui DS Asset Management.
“The Chinese authorities care about the stability of the currency market.”
On the financial markets, the BPC’s announcement caused the onshore yuan to fall while the Chinese stock markets were in the red.
(Report Winni Zhou and Tom Westbrook, with the contribution of Kevin Buckland, Blandine Hénault for the French version)
Copyright © 2023 Thomson Reuters