Investing.com -- The People’s Bank of China cut its benchmark loan prime rate for the first time in 10 months on Tuesday, moving to increase local stimulus measures as a post-COVID economic recovery in the country ran out of steam.
The PBOC cut its one-year Loan Prime Rate (LPR) to 3.55% from 3.65%, while the five-year LPR, which is used to determine mortgage rates, was cut to 4.20% from 4.30%.
The move was largely as expected by markets, given that the PBOC trimmed its medium and short-term lending rates last week. The LPR is decided by the central bank based on considerations taken from 18 designated commercial banks, who had also begun cutting rates on yuan deposits earlier in June.
Tuesday’s cut, which is the first such move by the PBOC since a surprise cut in August 2022, comes as a string of weak indicators pointed to a slowing economic recovery in China over the past two months. The move also puts the LPR at historic lows.
China’s massive manufacturing sector is grappling with weak demand, while the property sector - which was once a major economic driver - has failed to recover from a three-year slump.
Lower interest rates and easier borrowing conditions are also aimed at supporting the property market.
A slew of major investment banks, most recently Goldman Sachs (NYSE:GS), cut their outlook for China’s economic growth this year, stating that current levels of stimulus will be insufficient to support growth. The country may trim lending rates further if weakness in the economy persists.
In addition to sluggish business activity, China is also coping with a steady disinflationary trend this year, amid weak consumer and business spending.
This has put the PBOC among the few outliers in global central banks this year, with most of them hiking interest rates to curb high inflation.
But this trend has also weighed on the yuan, with the Chinese currency trading near seven-month lows amid a widening gap between local and international interest rates.