China has lowered its prime loan rate for five-year loans by 25 basis points, to 3.95%, which is the biggest decrease since 2019. By lowering the minimum mortgage rates for prospective homeowners, this action may increase the slow-moving demand for housing as selling prices decline. The prime rate for one-year loans set by the People’s Bank of China (PBOC) remains at 3.45%. It’s uncertain, though, if the five-year LPR cut will have a major positive impact on the economy. The fact that the PBOC cut rate exceeded market expectations could mean that decision-makers realised they needed to move swiftly and are committed to helping the housing sector recover.
By December, the average percentage of newly approved mortgages had already dropped to a record low of 3.97%. Analysts caution that the central bank may be hesitant to continue to accept significantly large rate reductions that are necessary to stimulate credit expansion and economic activity. In the previous year real estate sales revenue dropped by 6.5% and the commercial residential housing area sold shrank by 8.5%. The PBOC also supported the using other techniques. It reduced the reserve requirement ratio earlier this month, releasing 1 trillion yuan of liquidity into the banking system. Additionally, it reduced interest rates on money that was lent to creditors as a means of encouraging loans to small and rural businesses.
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