China cuts interest rates for third time in just over a week

The People's Bank of China (PBOC) on June 20 cut two more key lending rates to boost growth in the world's second-largest economy.

The five-year loan prime rate (LPR) - the reference rate for mortgages - was cut from 4.3% to 4.2% in June.

The one-year lending facility rate – the benchmark for medium-term lending for corporate loans – was also cut from 3.65 to 3.55%.

The cuts come after the country’s economic activity cooled broadly in May, adding to market concerns about a faltering recovery from the pandemic. Both key lending rates were last cut in August 2022.

“A 0.1% cut is too small to make a big difference to monetary conditions, especially when market interbank rates are already below policy rates,” said researchers Julian Evans-Pritchard and Zichun Huang of independent economic research firm Capital Economics in London, UK.

“However, the PBOC tends to use policy rate changes as a signaling tool. Tools such as reserve requirements and bank lending quotas are more subject to adjustment. The latest rate cut suggests that these tools will also be deployed,” they said.

World - China cuts interest rates for the third time in just over a week — The headquarters of the People's Bank of China (PBOC) in Beijing. Photo: China Daily

The latest rate cut follows two monetary easing moves last week. The PBOC cut its one-year medium-term lending facility for the first time in 10 months on June 15 and lowered the seven-day reverse repurchase (repo) rate on June 12.

The move on June 20 was widely expected after a series of economic data in recent weeks, from industrial production and fixed asset investment to retail sales and trade in May, missed expectations. China appears to be teetering on the brink of deflation as reopening optimism evaporates.

Some of the world's leading investment banks such as Goldman Sachs and JPMorgan have cut their forecasts for China's 2023 GDP growth to 5.1-5.7% from 5.5-6.3% previously.

On June 16, China's State Council pledged to roll out "more powerful measures" in a timely manner to "enhance economic development momentum, optimize economic structure and promote sustainable economic recovery."

“Wider policy statements, including the State Council meeting on June 16, make clear that Chinese officials are increasingly concerned about the economy and that supporting growth is now taking priority over other concerns, including bank profits,” said Capital Economics analysts .

Nguyen Tuyet (According to CNBC, Reuters, SCMP)

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