China Central Bank Cuts Key Interest Rate on Bank Lending

By John Mercury August 22, 2023

Cutting interest rates slightly makes it a little cheaper for companies and households to borrow money and to make payments on existing loans. The interest rates on most loans are reset annually, often at the start of each year, so the full effects of Monday’s action may be delayed.

The central bank, the People’s Bank of China, reduced the one-year interest rate for commercial bank loans by a tenth of a percentage point to 3.45 percent, less than expected. But it did not reduce its benchmark interest rate for commercial banks’ five-year loans, leaving it at 4.2 percent.

A survey of 35 economists by Reuters last week showed that all of them expected the central bank to reduce interest rates for five-year loans as well as one-year loans. The five-year loans are mainly used for setting the interest rates on mortgages.

Last week, the central bank lowered borrowing costs for commercial banks by 0.15 percentage points. By making a more modest cut in the lending rates, policymakers were, in effect, widening the profit margins for banks.

China’s commercial banks have lent massively in recent years to real estate developers and home buyers — the same groups that have been hit hardest by China’s housing crash.

source

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