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Kristian Wright 01 / April / 24

People's Bank of China dramatically cuts LPR rate


China cuts five-year prime lending rate in unprecedented way
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The People's Bank of China (PBOC) has made an unprecedented cut in the five-year prime lending rate that will affect the cost of mortgages. The decision is part of a drive by decision makers in Beijing to revitalize the real estate market and stimulate the economy.

The five-year benchmark lending rate (LPR) has been cut by 25 basis points to 3,95% from 4,20%. The one-year rate remained unchanged at 3,45%.

This is the largest reduction in the LPR rate in five years since its introduction in 2019. Analysts had expected China's central bank to cut the rate, but by a smaller amount.

"This is a major signal. The biggest rate cut cycle in history has begun," commented Yan Yuejin, an analyst with China's E-House Research Institute.

The BCC's decision will directly affect the real estate sector by lowering borrowing costs, he added.

Most new and existing loans in China are based on one-year rates, while five-year rates will affect real estate borrowing costs.

In a Reuters poll of 27 market watchers this week, 25 participants said they expect China's central bank to cut the five-year benchmark lending rate by 15 basis points.

The yuan fell to its lowest level since Nov. 20 but has since recovered some of its losses. The real estate sector has made progress.

The last time the LPR rate was reduced for a five-year period was in June 2023. At that time, BCC cut the rate by 10 basis points.

Many analysts and investors expect new measures to support consumption and prices in the real estate market. The decision by Chinese authorities to change the head of the financial market regulator is fueling their hopes.

Ben Bennett, a strategist at Legal & General Investment Management in Hong Kong, said of the BCC's decision, "It's more of a signal."

"Most people won't buy a home because the cost of borrowing is high and they fear the developer will go bankrupt," he added. "But this shows a determination to support the housing market."

The new prime rate will take effect immediately, but will not apply to existing contracts until next year.


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