China cuts key rates, steps up monetary stimulus to boost economy

[January 20, 2022]  SHANGHAI (Reuters) -China lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy, after data earlier in the week pointed to a darkening outlook for the country's troubled property sector.

The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by China's central bank on Monday to its short- and medium-term lending rates, and came days after the central bank's vice governor flagged more moves ahead.

With the property sector's downturn seen persisting into 2022 and the fast-spreading Omicron variant dampening consumer activity, many analysts say those easing measures will be necessary, even as other major economies, including the United States, appear set to tighten monetary policy this year.

December economic data showed further weakening in consumption and the property sector, both major growth drivers.

At a monthly fixing on Thursday, China lowered its one-year loan prime rate (LPR) by 10 basis points to 3.70% from 3.80%. The five-year LPR was reduced by 5 basis points to 4.60% from 4.65%, its first cut since April 2020.
 

China's central bank "should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner," People's Bank of China Vice Governor Liu Guoqiang said on Tuesday, heightening market expectations for more stimulus.

All 43 participants in a snap Reuters poll had predicted a cut to the one-year LPR for a second straight month. Among them, 40 respondents also forecast a reduction in the five-year rate.
 

 A man checks phone at Lujiazui financial district in Pudong, Shanghai, China March 14, 2019. REUTERS/Aly Song

The cut to the 5-year rate suggested that "the Chinese authorities are keen to lower the cost of credit lending, so total credit growth is expected to rebound after the Spring Festival to ease the pressure on macro economy," said Marco Sun, chief financial analyst at MUFG.

"China's monetary policy still has some room for easing in the first half of this year, depending on the policy transmission effect and the growth target set by annual parliamentary meeting in March."

Property firms' shares and bonds jumped on Thursday following the LPR cut, as investors hoped it and other recent government measures would help to ease a funding squeeze in the sector that has seen a growing number of developers default on their debts.

Sheana Yue, China economist at Capital Economics, expects a further 20 bps cut to the one-year LPR in the first half of this year.

Interest rates on medium-term lending facilities (MLF) serve as a guide to the LPR. Market participants believe moves to the LPR should mimic adjustments to MLF rates.

Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Muralikumar Anantharaman, Christopher Cushing, Gerry Doyle and Kim Coghill)

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