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China unveiled unexpected cuts in lending interest rates days after a top Communist Party policy meeting, in a sign of government efforts to boost lagging momentum in the world’s second-largest economy.
The People’s Bank of China announced on Monday that the one-year benchmark lending rate, widely used as a benchmark for corporate lending, will be cut by 0.1 percentage point to 3.35 percent, the first such cut since August last year.
The five-year equivalent, which influences mortgage pricing, also fell 0.1 percentage point for the first time since February, to 3.85 percent.
The cuts came after China’s central bank cut the so-called reverse repo rate, a seven-day rate used to price short-term lending, by 0.1 percentage point to 1.7 percent. The People’s Bank of China said the move was aimed at “promoting counter-cyclical adjustments to better support the real economy.”
The People’s Bank of China also cut interest rates on its so-called standing lending facility, loans to banks in need of short-term cash, by 0.1 percentage point across all maturities on Monday.
China has repeatedly cut key lending rates in recent years amid a prolonged property market slowdown and weak domestic consumption, and policymakers have been under pressure to take more action to shore up investor and consumer confidence.
Official data last week showed the economy grew by 4.7 percent in the second quarter, below expectations, while metrics in the property sector deteriorated.
“This quantitatively modest but symbolically significant set of measures signals that the government is finally willing to use macroeconomic stimulus to support faltering economic activity,” said Eswar Prasad, an economics professor at Cornell University.
The rate cut came on the heels of the third congress of the Communist Party of China, a closely watched closed-door meeting where the party’s central committee sets its policy direction. At this year’s meeting, which concluded on Thursday, officials voiced concerns about the economy and pledged additional support.
In recent months, Beijing has allowed state-owned companies to buy up unsold homes in a bid to address a slowing property market. But there are few signs of improvement in the sector, with new home prices falling 4.5 percent last month, the biggest drop in nearly a decade.
China’s interest rate setting framework has evolved significantly in recent years, with rates such as the mortgage rate now tied to a medium-term lending facility set by the People’s Bank of China that affects banking sector liquidity. Pan Gongsheng, the central bank governor, hinted in June at a greater role for the repo rate in setting policy in the future.
Monday’s cuts “could be seen as a signal from the PBOC to the new status of the seven-day reverse repo rate as the policy rate,” depending on whether other benchmark interest rates are also cut in the coming weeks, said Lin Song, ING’s chief economist for Greater China.
Analysts cautioned that the impact of such cuts is likely to be moderate. Prasad said mortgage rate cuts were “unlikely to be effective” unless “accompanied by broader fiscal stimulus and policy reforms to revive flagging private sector confidence.”
“If the PBOC is serious about monetary stimulus, it should cut interest rates more substantially,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “However, efforts to stabilize long-term yields and keep the currency undervalued mean that a broad-based rate cut still looks unlikely.”
The yield on China’s 10-year sovereign bonds fell to 2.24 percent on Monday after the cut, while the renminbi weakened to its lowest in nearly two weeks at 7.28 against the dollar.
Additional reporting by Joe Leahy in Beijing
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