The People’s Bank of China (PBOC) announced a slash of its benchmark lending rate and the mortgage reference by a larger margin on Aug 22, extending to the republic’s easing measures, according to Reuters.
The news agency stated that the action is Beijing intensifying its attempts to revitalise its economy which is hampered by a property crisis and the resurgence of COVID-19 cases.
Reports stated that in its efforts to revitalise economic growth, the PBOC)is looking for the balance. The belief is that offering excessive stimulus could exacerbate inflationary pressures and increase the risk of capital flight as the US Federal Reserve and central banks in numerous countries are quickly raising interest rates.
However, sluggish credit demand forces the PBOC’s hand as it attempts to stabilise China’s economy.
A recent monthly fixing by the central bank announced a five basis points cut to its one-year loan prime rate (LPR) from 8.65% to 3.65% while its five-year LPR was reduced by 15 basis points to 4.3% currently.
According to reports, the LPR was most recently reduced in January of this year while the five-year LPR was revised in May, with the latter affecting the price of home mortgages.
Sheana Yue, China economist at Capital Economics stated that the PBOC’s recent announcements have given the impression that policy is being eased although not too drastically.
“We expect two more rounds of reductions of 10 basis points to the PBOC’s policy rates by the end of the year and we continue to anticipate a reserve requirement ratio (RRR) reduction in the next quarter,” Yue added.
The LPR reduction comes after the PBOC surprised the markets in the previous week by decreasing the medium term lending facility (MLF) rate and another short-term liquidity instrument, as a slew of recent data indicated the economy was losing pace due to sluggish global growth and rising borrowing costs.
In a recent Reuters poll that was done with 30 respondents, 25 of them expected a 10-basis points reduction to the one-year LPR. All respondents predicted a drop in the five-year tenor, with 90% predicting a reduction greater than 10 basis points.
Concerns over a wider policy divergence with other major economies pushed the Chinese yuan to a low levels not seen in nearly two-years. The onshore yuan last traded at 6.8232 US dollars per unit.
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