PBOC lowers benchmark lending rate for first time in 20 months

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China’s central bank on Monday lowered its benchmark prime lending rate (LPR) for the first time in 20 months as it seeks to support a slowing economy.

The People’s Bank of China lowered the one-year loan prime rate to 3.80% from 3.85%, while the five-year loan prime rate remained unchanged at 4.65%. This was the first reduction in the benchmark LPR since April 2020, after the pandemic. Analysts expected no change.

According to state media, the PBOC decided that “prudent monetary policies should be flexible and appropriate, and liquidity should be maintained at a reasonable and sufficient level.”

Craig Botham, China+ Chief Economist at Macroeconomics Hall of Fame, said the rate cut provides a dovish signal, but very modest support for growth.

“Five basis points doesn’t move the needle very far and will only benefit big business anyway,” he said. “The SME sector, under the greatest pressure at the moment, will need additional and distinct policy support.”

Botham noted that the LPR is technically not a policy rate, but rather reflects the best rate offered by 18 banks.

“Nevertheless, it serves as a reference rate for loans estimated at 180,000 RMB, which will – slightly – reduce borrowing costs. As the name suggests, however, the prime lending rate is only offered to the strongest companies, which are arguably the weakest The reduction will also eat away at banks’ margins, given that there has been no change in the MLF rate – currently at 2.95% – on which the LPR is based.”

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