China cuts benchmark lending rates to boost slumping economy

China recently cut the loan prime rates in an attempt to boost the number two economy in the world as a declining demand in the domestic market and a trade war with the United States hampered their economy's growth. According to reports, the one year loan prime rate (LPR) was slashed by five basis points to a total of 4.14 per cent from a previous 4.20 per cent alongside the five year LPR being reduced to 4.80 per cent from 4.85 per cent. These cuts in the LPR is just one of the instances to have taken place in an attempt to push commercial banks to provide loans to small and medium-sized businesses hurting a sluggish Chinese economy.

Similarity in the cuts

Chief economist at Founder Securities, Yan Se, stated that the cut in the one year LPR reflected similar cuts in the other two interbank rates, underlying the central bank's motive to reduce borrowing costs to boost activity in the Chinese economy. According to reports, the People's Bank of China all of a sudden reduced the lending rate on November 18, two weeks after a cut in the medium-term lending facility and a first such cut in a span of four years, acting as a cue for the markets that authorities are all set to boost the sluggish economic growth.

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LPR slashed three times

However, the one year LPR has already been slashed three times since it was termed as the official lending rate in the month of August and the current cuts indicated that the central bank of China went ahead with the lowering costs despite the pressure on the topic of Inflation following a steep rise in Pork prices in relation to an outbreak of African Swine Fever. The five year LPR was cut for the first time since August and is used by the markets to set housing mortgages depending on the lending rates.

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Loan prime rate

The loan prime rate is a lending rate set by every month by 18 banks and the People's Bank of China renewed the lending mechanism to accordingly price LPR in the month of August, attaching it to the medium-term lending rate. (NIFC) National Interbank Funding Center is the official publisher of the LPR that has been authorised by the PBOC.

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(With inputs from agencies)