China banks cut key rate by record to boost ailing economy

CHINESE banks cut a key interest rate for long-term loans by a record amount, a move that would reduce mortgage costs and may boost weak loan demand amid a property slump and Covid lockdowns.

The 5-year loan prime rate, a reference for home mortgages, was lowered to 4.45 per cent from 4.6 per cent, down by the most since a revamp of the rate in 2019, according to a statement by the People's Bank of China (PBOC) Friday (May 20). A majority of economists surveyed by Bloomberg had predicted a cut by 5 to 10 basis points.

The cut comes after the PBOC earlier reduced the floor on the rate for new mortgages Sunday in an attempt to spur demand for new loans, which dropped in April. The LPRs are based on interest rates that 18 banks offer their best customers, and were last reduced in January following a cut in PBOC's policy loan rates.

While the central bank kept rates unchanged on May 16, banks' funding costs have come down in recent weeks, giving them scope to lower rates.

"The cut in the 5 year LPR rate reflects the focus on supporting the property sector, in line with the recent relaxation measures," according to Frances Cheung, rates strategist at Oversea-Chinese Banking in Singapore. "The rates market is unlikely to take the unchanged one year LPR as a disappointment," as the money market has been functioning smoothly and a cut probably wasn't needed, she said.

A Bloomberg gauge of Chinese real estate developers gained as much as 1.4 per cent after the decision.

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The reduction in loan rates would help reduce business and consumers' borrowing costs and may boost demand for loans and support economic activity. The economy has taken a heavy hit from measures to contain the worst Covid outbreak since early 2020 and an ongoing property market slump also curbed borrowing, with loan growth weakening sharply in April to the worst level in almost 5 years.

The 1-year loan prime rate - the de facto benchmark lending rate - was kept unchanged at 3.7 per cent. The majority of economists surveyed by Bloomberg had predicted a cut of either 5 or 10 basis points. BLOOMBERG