BEIJING/SHANGHAI (Reuters) -China cut benchmark lending rates for the first time since October on Tuesday, while major state banks lowered deposit rates as authorities work to ease monetary policy to help buffer the economy from the impact of the Sino-U.S. trade war.
The widely expected rate cuts are aimed at stimulating consumption and loan growth as the world’s No. 2 economy softens, while still protecting commercial lenders’ shrinking profit margins.
Still, the size of the rate reductions was mild and reflected the incremental pace of monetary easing in recent years and what analysts interpreted as some wariness among policymakers for more aggressive steps while they navigate the trade war with the United States.
The People’s Bank of China said the one-year loan prime rate (LPR), a benchmark determined by banks, had been lowered by 10 basis points to 3.0%, while the five-year LPR was reduced by the same margin to 3.5%.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. Both rates are now at the lowest level since China ravamped the LPR mechanism in 2019.
The lending rate cut was announced just after five of China’s biggest state-owned banks said they had trimmed their deposit interest rates.
Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and Bank of China reduced deposit rates by 5-25 basis points (bps) for some tenors, according to rates shown on the banks’ mobile apps. Reuters had reported on Monday that the banks planned to cut their deposit rates from Tuesday.
The deposit rate reductions should guide smaller lenders in making similar cuts.
Banking shares edged higher following the rate decision, with the CSI Bank Index rising 0.3%.
Marco Sun, chief financial market analyst at MUFG Bank (China), said the rate cuts were aimed at boosting credit lending and stimulating consumption.
“The central bank is likely to switch to a wait-and-see approach in coming months unless external geopolitical risks deteriorate enough to extinguish hopes that the economy can stabilise,” Sun said.
RECOVERY REMAINS FRAGILE
The rate cuts are part of a package of measures announced by PBOC Governor Pan Gongsheng and other financial regulators before talks between China and the U.S. in Geneva earlier this month that led to a de-escalation in their trade war.
Global investment banks are raising their forecasts for China’s economic growth this year, after Beijing and Washington agreed to a 90-day pause on tariffs, despite uncertainty around Sino-U.S. trade negotiations.
