China unexpectedly cuts benchmark interest rates by 10 basis points

He People’s Bank of China (PBOC, central bank) The Fed today announced an unexpected reduction of ten basis points to its reference interest rate, the one-year LPR, which will go from 3.45%, the level at which it had remained since August of last year, to 3.35%.

In the monthly update published on its website, the institution indicated that the one-year reference rate (LPR) for loans will remain at the aforementioned level for at least one month.

The decision has come as a surprise to analysts, as the most widely held forecast was that the central bank would keep its benchmark rates unchanged in this month’s update.

This indicator, established as a reference for interest rates in 2019, is used to set the price of new loans – generally for companies – and variable interest loans that are pending repayment.

It is calculated from the price contributions of a range of banks – including small lenders that tend to have higher funding costs and greater exposure to bad loans – and is intended to lower borrowing costs and support the ‘real economy’.

The last reduction in the one-year LPR dates back to August 2023, when the PBOC announced a 10-point cut, from 3.55% to the current 3.45%, a more cautious decision than the experts had anticipated at the time, who were pointing to a 15 basis point drop.

What the experts say about China

Experts believe that the PBOC then opted for caution in the face of divergence with other powers – where rates have been on the rise to contain inflation – and the resulting pressure on the exchange rate of the national currency, the yuan, although the authorities are already anticipating a possible change of course among the main central banks throughout this year.

The institution also indicated today that the LPR for five years or more, the reference for mortgage loans, will experience an identical reduction, going from the current 3.95% to 3.85%. Its last decrease dates back to last February, when it fell 25 basis points from 4.2%, more than expected by experts.

As with the one-year LPR, this new cut was not within the forecasts of analysts for this month.

The downgrade of the LPR to five years or more could be related to Beijing’s interest in reviving a property market mired in a long-standing crisis. The ruling Communist Party (CPC) stated at a recent plenum on economic policy its aim to “prevent and defuse risks in the property sector.”

Following the aforementioned cut in February, analysts pointed out that the decision was due precisely to the authorities’ concerns about the real estate market.

Chinese central bank also lowers repo rate to facilitate liquidity injections

The People’s Bank of China announced today a reduction of ten basis points, from 1.8% to 1.7%, in the rates it applies to one of its main liquidity injection tools, the 7-day reverse repurchase agreements (‘repos’), which were already at historic lows.

On its website, the institution stated that this initiative aims to “strengthen countercyclical regulation and increase financial support for the real economy.”

The PBOC then injected 58.2 billion yuan (8.004 billion dollars, 7.35 billion euros) into the Chinese financial system through these 7-day repos at 1.7%.

In a separate statement, the Chinese central bank also indicated that it will reduce the collateral required by banks and financial institutions for medium-term lending (MLF) facilities.

MLFs are a tool created in 2014 to finance commercial banks and guide benchmark interest rates. When they are lowered, it means that the cost of lending money to banks is reduced.

Starting this month, the BPC noted, participating institutions in the MLF that plan to sell medium- or long-term bonds will be able to request a gradual reduction or exemption from these guarantees.

The aim, the institution said, is to “increase the scale of negotiable bonds and relieve pressure on supply and demand in the bond market.”

These announcements came minutes before the PBOC announced an unexpected 10 basis point rate cut.