China yesterday cut its benchmark lending rate, as widely expected, as the authorities move to lower financing costs for businesses and support an economy jolted by a severe COVID-19 outbreak.
The outbreak has upended global supply chains and caused widespread disruption to businesses and factory activity in China, prompting authorities to deliver a steady stream of policy measures to cushion the blow to economic growth.
The one-year loan prime rate (LPR), the new benchmark lending gauge introduced in August last year, was lowered by 10 basis points to 4.05 percent from 4.15 percent at the previous monthly fixing.
The five-year LPR was lowered by 5 basis points to 4.75 percent from 4.80 percent.
The LPR cut followed a similar move to the central bank’s medium-term lending rate on Monday. Investors are betting the authorities would roll out more monetary easing and fiscal stimulus in the near term to help smaller businesses that are struggling to tide over the crisis.
Mayank Mishra, macro strategist at Standard Chartered Bank in Singapore, said the LPR cut might not be enough to overcome the economic impact of the virus.
“The Chinese authorities are sending a message that easing will happen, but it will happen at a measured pace. They do not want to fuel expectations that they will be easing aggressively,” Mishra said.
“We expect more monetary easing in the form of 100 basis points in the reserve requirement ratio and 10 basis points in the medium-term lending facility in addition to what we’ve already seen,” Mishra added.
The yuan weakened to a more than two-month low against the US dollar after the LPR cut, mainly pressured by further easing expectations.
Banks are already setting lending rates well below the benchmark and if government subsidies are taken into account, some borrowers might not pay any interest at all, sources said.
Some analysts said the minor cut to the five-year LPR likely signaled that authorities wanted to avoid stoking a property bubble and causing more damage to the economy in the longer run.
The People’s Bank of China has pledged to use tools, such as targeted reserve requirement cuts, relending and rediscount, to support key sectors affected by the outbreak, having already injected more than US$200 billion in liquidity in a bid to help lower financing cost.
When compared with a year earlier, China’s first-quarter growth could slump to 4.5 percent from 6 percent in the fourth quarter, the latest Reuters poll showed.
Some analysts warn of even lower growth closer to the 3 percent mark, underlining the widespread business disruption caused by the virus.
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