Wednesday, November 20, 2019

China cuts new benchmark LPR rate 3rd time

    China's central bank lowered its one-year Loan Prime Rate (LPR) by another 5 basis points to 4.15 percent, the third cut since it was designated as the new benchmark lending rate in August.
     The People's Bank of China (PBOC) also lowered the five-year LPR by 5 basis points, used to price mortgages, to 4.80 percent, the first cut in this tenor since August. 
      The rate cut was widely anticipated as it comes on the heels of cuts to two other lending rates earlier this month and confirms PBOC's concerted effort to lower the cost of financing throughout the banking system and boost economic activity.
     On Aug. 17 PBOC reformed its mechanism for calculating LPR to improve the transmission of its policy decisions to the economy and on Aug. 20 it announced LPR for the first time under this new framework, setting it at 4.25 percent.
     This was 6 basis points below the old LPR, which had been unchanged since October 2013, and 10 basis points below the previous benchmark lending rate.
     Under the new policy, LPR will be announced on the 20th of each month and on Sept. 20 LPR was cut by another 5 basis points to 4.20 percent while on Oct. 20 it was unchanged.
     LPR has now been cut by 16 basis points since it was designated the new benchmark lending rate, with today's cut following a 5-basis-point cut in the 7-day reverse repo rate to 2.50 percent on Nov. 18 and a 5-basis-point cut to 3.25 percent for the medium-term lending facility (MLF) on Nov. 5.
      Today PBOC said it didn't conduct any reverse repurchase operations on Nov. 20 "due to reasonably adequate liquidity" in the banking system. 
     China's economy has been slowing for the last six quarters, with annual growth in gross domestic product slowing to 6.0 percent in the third quarter from 6.2 percent in the second quarter and 6.4 percent in the first quarter of this year.
     Growth in the third quarter was the weakest since the first quarter of 1992 but PBOC has been steadily loosening its monetary policy stance this year by lowering reserve requirements and cutting interest rates to ensure economic activity doesn't contract further.
     Most recently, PBOC Governor Yi Gang on Nov. 19 said credit support to the economy would be stepped up and lending rates would be pushed lower.
     In his meeting with representatives from commercial banks, Yi also urged them to refer to LPR when issuing new loans.
     Meanwhile, inflation jumped to a 2019-high of 3.8 percent in October, the highest since January 2012, from 3.0 percent in September due to a surge in pork prices from an outbreak of swine fever.


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