China slashes key benchmark lending rates to revive sluggish economy

Amid efforts to reviveits sluggish economy, the second-largest in the world, China has slashed key benchmark lending rates, a move taken for the second time this year, media reports said.The People's Bank of China (PBOC) took action on Monday by decreasing the one-year loan prime rate (LPR) by 10 basis points from 3.55 per cent to 3.45 per cent.

Notably, there was no change to the five-year rate, which remains at 4.20 per cent. This move to lower the one-year benchmark lending rate was widely expected.

Days back, China, in an unexpected turn of events, cut down key policy rates, a decision which clearly indicated an escalated effort by Chinese authorities to implement monetary easing measures. This development sparked speculation about a potential cut in China's lending benchmark loan prime rate (LPR), which turned out to be the case on Monday.

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However, economists were surprised by the absence of cuts to the five-year rate, media reports said.

What were the expectations?

A majority of experts surveyed by Reuters had foreseen a 15-basis-point reduction in the one-year rate, which significantly influences new and existing loans. Moreover, these analysts had anticipated a decrease of at least 15 basis points in the five-year rate, which serves as a reference rate for mortgages. The surprise absence of action on the five-year rate left many puzzled.

Economic factors driving the decision

Credit growth decline and escalating deflation concerns in July have led to the need for additional monetary easing measures to counteract the economic slowdown.

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The market has also been affected by apprehensions about potential defaults from housing developers and payment defaults by private wealth management firms, causing a decrease in financial market confidence.

Most recently, real estate behemoth Evergrande has filed for bankruptcy protection in the United States amid the escalating real estate turmoil in China.Tommy Wu, Senior China economist at Commerzbank, said,"All of these add to the urgency that policymakers need to act fast before consumer and business confidence deteriorate sharply."

MLF rates

Earlier, PBOC reduced the interest rate for one-year medium-term lending facility (MLF) loans totalling 401 billion yuan ($55.25 billion) provided to certain financial institutions. The rate was lowered by 15 basis points, settling at 2.50 per cent as opposed to the previous 2.65 per cent.

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In an online statement, the PBOC clarified that this infusion of funds was aimed at mitigating various factors, including tax payments, with the intention of maintaining a suitable level of liquidity within the banking system.

(With inputs from agencies)

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