China Lowers Benchmark Lending Rates by 25 Basis Points

China Lowers Benchmark Lending Rates by 25 Basis Points | CIO Women Magazine

PBOC Reduces Key Interest Rates

On Monday, China’s central bank, the People’s Bank of China (PBOC), reduced its benchmark lending rates by 25 basis points, aligning with market expectations. The one-year loan prime rate (LPR), which affects corporate and household loans, was lowered to 3.1%, while the five-year LPR, serving as a reference for mortgage rates, was cut to 3.6%. This adjustment follows remarks by PBOC Governor Pan Gongsheng, who hinted at the possibility of such cuts during a forum in Beijing the previous week.

In addition to reducing the LPR, Pan mentioned other potential monetary policy changes that could occur by the end of the year, including lowering the reserve requirement ratio (RRR) by another 25 to 50 basis points, depending on liquidity needs. He also highlighted plans to cut the seven-day reverse repurchase rate by 20 basis points and the medium-term lending facility rate by 30 basis points.

Economic Impact and Expert Reactions

While the reduction in lending rates was widely anticipated, experts have raised concerns about whether these measures will be enough to boost China’s struggling economy. Shane Oliver, head of investment strategy at AMP, acknowledged that the cuts signal ongoing monetary stimulus but noted that they are not sufficient to address the country’s deeper economic challenges. “The cost of money is not the main issue in China; the real problem is a lack of demand,” Oliver stated, emphasizing the need for additional fiscal stimulus to stimulate growth.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, echoed similar sentiments, stating that even with these rate cuts, China’s real interest rates remain too high. He expects more rate reductions next year, especially as the U.S. Federal Reserve is likely to lower its own rates.

Broader Context: Property Crisis and Economic Struggles

The rate cuts come as China continues to grapple with economic challenges, including a prolonged property crisis and weakened consumer sentiment. In response, the PBOC has been implementing various support measures. Last month, the central bank reduced the reserve requirement ratio by 50 basis points and surprised markets in July by cutting both short- and long-term lending rates.

Despite these efforts, China’s economy remains under pressure. However, recent data offered a glimmer of hope, as the country reported better-than-expected third-quarter GDP growth of 4.6% year-on-year. Additional economic indicators, such as retail sales and industrial production figures for September, also surpassed expectations, suggesting that the economy may be stabilizing, albeit slowly.

As China continues to navigate its economic recovery, experts believe that monetary stimulus alone may not suffice and are calling for stronger fiscal interventions to drive demand and sustain growth in the long term.

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