China: Central Bank Cuts Benchmark Interest Rates In A Bid To Shore Up An Economy Facing A Slowdown

China’s central bank cut its benchmark interest rates for the second consecutive month in a bid to shore up an economy that is facing a slowdown.

The People’s Bank of China lowered its one-year loan prime rate – on which most new and outstanding loans for corporates and households are based - from 3.8% to 3.7%. It also dropped the five-year rate, considered the reference rate for mortgages, for the first time in nearly two years.

With the benchmark LPR reductions, the central bank hopes to stimulate corporate investment and consumption, two primary drivers of economy, as China faces the headwinds that threatens to cause an economic slump

The central bank hopes that the rate cut will prompt financial institutions to lend more money to companies and other entities, a step that can potentially bolster consumption and domestic investment.

Hit by headwinds on multiple fronts including domestic COVID-19, power crisis, supply chain bottlenecks and real estate sector debacles, China’s economy grew by a tepid 4 per cent in the fourth quarter of 2021 slowing from the 4.9 per cent growth in the third (July to September) quarter.

While China 's GDP expanded by 8.1 per cent in 2021 (boosted by 18.3 percent growth in the first and 7.9 percent in second quarter), the country's GDP growth is projected to moderate at around 5.5 percent in 2022.

The rate reduction came as a relief to the struggling real estate developers reeling under debt crisis.

The cut in mortgage rates combined with a government plan to grant them easier access to sales receipts is likely to bring relief to their cash crunch and mounting debt.