China’s Benchmark Lending Rate Lowered

by Warren Seah

China’s central bank has announced a slight reduction in its benchmark lending rate to provide additional support for the country’s slowing economy. While the cut was smaller than expected, it is still an important move.

Loan Prime Rate Adjustments

The one-year loan prime rate (LPR) has been lowered by 10 basis points to 3.45%. However, the five-year LPR will remain at 4.2%, according to the People’s Bank of China (PBOC).

Last week, the PBOC already reduced the interest rate of the one-year medium-term lending facility (MLF) by 15 basis points to 2.5%. The MLF rates serve as a reference for pricing the benchmark LPR in China. It was anticipated that the LPR would be lowered by more than 10 basis points due to these MLF cuts.

Reluctance of Chinese Lenders

The smaller reduction in the LPR could be attributed to Chinese lenders’ reluctance to further decrease their lending rates. This hesitation is mainly driven by concerns regarding their narrowing profit margins. The benchmark rate is determined through quotations provided by a group of Chinese lenders, who price their prime loans based on the PBOC’s MLF rates.

Economic Slowdown

The decision to lower the benchmark lending rate comes as the Chinese economy experienced a general slowdown throughout July. Addressing this downturn is a priority for the government, hence the recent measures taken by the central bank.

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