Lending Association

China’s central bank cuts key interest rate to aid mortgage holders

China’s central bank has blinked and will cut the key official interest rate, which influences mortgage costs, in an attempt to provide assistance to the millions of mortgage holders trapped in the black hole known as the country’s property sector.

In a statement on its website Tuesday lunchtime, the People’s Bank of China announced a 25-point cut to the five-year loan prime rate (LPR), reducing it to 3.95% from 4.20%. This marks the first cut since last August.

The one-year prime loan rate was left steady at 3.45%, as was the key one-year medium loan facility on Sunday night. The one-year rate serves as the base for most household and corporate loans in China, but the five-year loan rate acts as the peg for most mortgages, where the strain is being felt. This is a reason why tens of millions of consumers are not spending at the moment.

The unexpected cut follows the decision to leave the one-year MLF rate unchanged on Sunday night, the first decision from the central bank since the end of the Lunar New Year holiday on Saturday.

The LPR, set by the PBOC based on considerations from 18 designated commercial banks, has now reached record-low territory, indicating growing concern in the government about the weak economy, deflation, and the lack of traction for the stimulatory ideas floated thus far.

While the PBOC has been hesitant to trim interest rates due to concerns over further weakness in the yuan, its hand has been forced with the end of the holidays, as the real economy returns to remind the government of the severity of the concerns about the property crisis.

The announcement, again made via a statement on the website, contrasts with the previous months’ 0.50% cut in bank reserve ratios, which was accompanied by a blare of publicity and media conference in Beijing and kicked in at the start of this month.