China lowered its benchmark lending rates on Tuesday for the first time since October, as policymakers seek to support fragile credit demand and economic growth amid easing trade tensions with the United States.
The People's Bank of China reduced the one-year loan prime rate (LPR) to 3.0% from 3.1% and the five-year LPR to 3.5% from 3.6%. The cuts follow earlier moves by five of China's biggest state-owned banks to trim deposit interest rates by 5 to 25 basis points, according to rates posted on the banks' mobile apps.
Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of China were among the lenders that made the changes on Tuesday, as previously reported by Reuters.
Marco Sun, chief financial market analyst at MUFG Bank (China), said the move was intended to boost credit lending and stimulating consumption. He added: "The central bank is likely to switch to a wait-and-see approach in coming months unless external geopolitical risks deteriorate enough to extinguish hopes that the economy can stabilise."
The lending rate reductions came after a series of easing signals by the PBOC, including earlier deposit rate cuts and reductions in housing mortgage rates via the country's housing provident fund. Authorities have also introduced targeted policies for the property sector and signaled monetary support for the banking system.
Zichun Huang, chief China economist at Capital Economics, wrote in a research note that "the burden of supporting demand mostly rests with fiscal policy."
Huang also projected that the LPR will be lowered by another 40 basis points by year-end.
Recent macroeconomic data has shown signs of persistent weakness, with consumer prices falling for a third straight month in April and wholesale prices registering their sharpest decline in six months.
Nomura raised its forecast for China's second-quarter GDP growth to 4.8% from 3.7%, and lifted its full-year projection to 3.7%. The bank warned, however, that there remains "a high risk of the economy suffering from a double whammy," referencing the ongoing housing slump and uncertainty over future U.S. trade policy.
Following a meeting between U.S. and Chinese officials in Geneva earlier this month, both sides agreed to roll back most tariffs for 90 days, prompting banks and economists to adjust their expectations for stimulus.
Ting Lu, chief China economist at Nomura, wrote: "We still believe it will be quite challenging for Beijing to achieve its 'around 5%' growth target unless it rolls out a sizable stimulus package."
Morgan Stanley analysts stated that further easing is expected to be more measured. Additional stimulus measures are likely to be "lighter and delayed given a lower tariff path," the bank said in a note Monday.
Nicholas Zhu, an analyst at Moody's, said: "The reduction in deposit costs partly mitigates the impact of lower asset yields, which remain under pressure as banks are expected to support the real economy."
Xing Zhaopeng, senior China strategist at ANZ, described Tuesday's cuts as "a pre-emptive move." He added: "One purpose is to repair commercial banks' net interest margin and get prepared for the future."
Official data showed the net interest margin of Chinese commercial banks fell to a record-low 1.43% in the first quarter. Analysts at China International Capital Corp estimate that figure could fall by another 10 to 15 basis points this year.
