China cuts key interest rate for the first time in 20 months

China’s central bank cut its main interest rate for the first time in 20 months, as authorities step up efforts to boost an economy that has been hit by pandemic-related curbs, a real estate slump and an unprecedented crackdown on private enterprises.

The People’s Bank of China on Monday lowered its one-year loan prime rate (LPR) by 5 basis points to 3.8%. The LPR is the rate at which commercial banks lend to their best customers and it serves as the benchmark rate for other loans.

While Monday’s rate cut is small, it’s the first such move since April 2020, when China slashed the rate to boost its Covid-hit economy, which had just contracted for the first time in more than 40 years.

“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” said Zhaopeng Xing, senior China strategist at ANZ, in a research note on Monday.

A cut to the lending rate can help reduce borrowing costs for households and firms and in turn encourage consumer spending and investment.

Unlike the West, Beijing had refrained from flooding the economy with stimulus packages during the pandemic, focusing instead on offering targeted support to smaller businesses.

Xi Jinping, Li Keqiang, Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng attend the sixth plenary session of the 19th Communist Party of China Central Committee in Beijing, capital of China. The session was held in Beijing from Nov. 8 to 11.

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China was the only major economy to record growth in 2020, but this year the country’s expansion has been hit by several factors, forcing it to consider ways to provide support even as other major central banks withdraw stimulus and raise interest rates to fight inflation.

An energy shortage hobbled industrial output for much of this year, as the country struggled to balance its need for electricity with efforts to tackle the climate crisis.

Government data from last week showed that housing prices fell for a third consecutive month in November, a sign that an ongoing property crisis continues to deepen.

Retail sales also struggled, suggesting that coronavirus outbreaks, and the government’s “zero-Covid” approach of locking down areas where infections flare up, are taking their toll on the economy.

China’s top leaders have already expressed concerns about growth prospects. At a key economic meeting earlier this month, they said “ensuring stability” would be a top priority in the coming year. That’s a huge pivot from last year’s meeting, when “curbing the disorderly expansion of capital” ruled the day.

To counter rising economic risks, policymakers pledged at this year’s meeting to “front load” policies, including keeping the monetary stance “flexible.”

Last week, the central bank lowered the reserve requirement ratio for most banks by half a percentage point. That move, which reduces the amount of money that banks have to keep in reserve, is expected to unleash some 1.2 trillion yuan ($188 billion) for business and household loans, according to the PBOC.

Chinese President Xi Jinping (R) arrives with Premier Li Keqiang (L) and members of the Politburo Standing Committee for a reception at the Great Hall of the People in Beijing on the eve of China's National Day on September 30, 2021. (Photo by GREG BAKER / AFP) (Photo by GREG BAKER/AFP via Getty Images)

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Monday’s LPR cut should reduce “the interest burden” by about 80 billion yuan ($12.6 billion) per year, starting next year, for business and households, Xing from ANZ estimated.

“The PBOC wants to provide more easing as it gets more concerned of the economic momentum,” analysts from Societe Generale said in a research note on Monday.

“There should be no doubt by now that a serious (though still restrained) easing cycle is unfolding.”

The world’s second biggest economy could grow at its slowest pace since 1990 next year, according to economists.