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China’s central bank cuts benchmark lending rates

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Written by Publishing Team

China cut benchmark lending rates for the second month in a row, after the central bank lowered borrowing costs on medium-term loans earlier this week, in an effort to support a sluggish economy that is facing a new wave of coronavirus cases and suffering from a series of regulatory crackdowns.

The People’s Bank of China said Thursday it has cut the one-year loan prime rate to 3.70%, 10 basis points lower than last month’s 3.80% level. The five-year base loan rate has been reduced to 4.60% from 4.65%. It is the first time in 21 months that China has cut both rates in the same month.

The move was widely expected by analysts and traders after the central bank on Monday cut interest rates on its one-year medium-term lending facility by 10 basis points to 2.85%.

The central bank bases its benchmark lending rates each month on quotes from China’s major lenders. In return, banks price new loans using the loan’s prime interest rates as a reference. Since the new standard was introduced in 2019, Chinese banks have gradually replaced existing loans with new ones based on the new lending rates.

Thursday’s move was China’s second central bank cut in lending rates in several months. In December, the central bank lowered its one-year key loan rate after the country’s leaders pledged to prioritize growth stability, signaling many economists to start a new easing cycle.

On Tuesday, Liu Guoqiang, deputy governor of the People’s Bank of China, said the central bank would act earlier and more aggressively to stabilize the economy in 2022, a politically important year for Chinese leader Xi Jinping, from whom a breakaway is widely expected. Recent precedent and the pursuit of a third term in power at a closely watched Communist Party meeting later this year.

Liu said the central bank will direct financial institutions to expand credit issuance this year, while using a variety of tools to ensure ample market liquidity.

On Monday, China released a batch of economic data that showed growth slowed in the final months of the year, as the outbreak of the new Covid-19 virus and turmoil in the country’s real estate sector hit domestic consumption and weighed on sentiment.

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