China cuts benchmark lending rate for second time since virus outbreak

Credit: REUTERS/Carlos Garcia Rawlins

HONG KONG, April 20 (IFR) - China has cut its benchmark lending rate for only the second time since the coronavirus outbreak in a widely expected move after the central bank lowered the rate at which it provides liquidity to lenders last week.

The one-year loan prime rate was lowered today by 20bp to 3.85%, while the five-year LPR was cut by 10bp to 4.65%.

The LPR is a lending reference rate set by 18 banks against which all new loans and outstanding floating-rate ones are priced.

The People's Bank of China revamped the rate in August 2019, loosely pegging it to its medium-term lending facility rate.

The cut to the LPR was widely expected by analysts after the PBoC cut its one-year MLF last week by 20bp to 2.95%, the lowest rate and the biggest cut since the liquidity tool was introduced in September 2014.

The reduction today to the LPR is only the second cut to the benchmark rate since the coronavirus crisis started. The PBoC lowered the one-year LPR and five-year equivalent in February by 10bp and 5bp respectively.

Analysts said the most recent cut signals that authorities are beginning to loosen monetary policy in response to the economic downturn.

Beijing had previously been vocal about avoiding what it called a "flood-like stimulus" for fear of exacerbating already high levels of bad debts, but authorities are likely to step up their intervention after data last Friday showed GDP shrank by 6.8% during the first quarter, the first quarterly fall in economic activity since the Cultural Revolution more than four decades ago.

"It is easy to dismiss a 10bp–20bp decline in borrowing costs as insignificant for struggling firms," said Martin Rasmussen, China economist at Capital Economics. "But the PBoC has been easing monetary conditions through a range of other tools recently, too."

"The fall in the five-year LPR – which is used to price mortgages – could lead to speculation that authorities are finally allowing financial conditions in the real estate sector to loosen."

(Reporting by Thomas Blott; Editing by Vincent Baby)

((Thomas.Blott@thomsonreuters.com;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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