China announced on Tuesday its largest ever reduction in the benchmark mortgage rate, in an effort to assist the struggling property market and the broader economy, Reuters reported.
The 25-basis point cut to the five-year loan prime rate (LPR) exceeded analysts’ expectations and represents the largest decrease since the reference rate in 2019.
Yan Yuejin, an analyst at E-House China Research and Development Institution, stated, “This is the biggest signal. In other words, the largest interest rate cut cycle in history has begun.” The cut will directly impact the real estate sector by lowering mortgage costs.
Specifically, the five-year LPR has been adjusted to 3.95 per cent from its previous rate of 4.20 per cent, while the one-year LPR remains unchanged at 3.45 per cent.
The majority of new and existing loans in China are tied to the one-year LPR, while the five-year rate influences mortgage pricing.
According to a Reuters poll of 27 market observers conducted this week, 25 anticipated a reduction in the five-year LPR, with a projected decrease ranging from five to 15 basis points.
Furthermore, the deeper-than-expected cut suggests that Beijing is now less concerned about the adverse effects of lower lending rates on the currency or banks, as they were in the previous year.
A central bank-backed newspaper affirmed on Tuesday that the benchmark mortgage rate reduction would not negatively impact banks’ net interest margins.
Simultaneously, with reduced spillover effects from other major economies, particularly the United States, where the Federal Reserve is expected to implement rate cuts, Beijing has greater leeway to provide additional monetary policy support.
Beijing has intensified its efforts to revive the struggling property sector. However, these measures have been implemented inconsistently, placing a significant burden on an industry that contributes a quarter of the economy and impacts the stock market.
In 2023, new home prices experienced their most substantial decline in nine years, while the stock market continues to languish after reaching its lowest point in five years.
