China cuts key rates after third plenum to support economy, but ‘heavy lifting’ needed

People’s Bank of China lowered the seven-day reverse repo rate, as well as both the one-year and five-year loan prime rates

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China’s third plenum finished on Thursday. Photo: AFP

Published: 9:31am, 22 Jul 2024Updated: 1:54pm, 22 Jul 2024

China cut its key short-term policy rate and the mortgage reference rate on Monday, with analysts saying the move just days after the conclusion of a high-level meeting that had focused on reviving the national economy represented “reactive easing”.

The People’s Bank of China lowered the seven-day reverse repo rate – a widely used liquidity injection tool – by 10 basis points to 1.7 per cent in a move to increase financial support for the real economy. In total, the Chinese central bank sold 58.2 billion yuan (US$8 billion) of seven-day reverse repos.

It also lowered the one-year loan prime rate to 3.35 per cent, down from the previous reading of 3.45 per cent, while also making the same 10-basis points cut to the five-year LPR, as the rate commercial banks use as a benchmark to adjust their mortgage rates was lowered to 3.85 per cent.

And while analysts expect more rate cuts, they also urged future fiscal measures and policy support to do the “heavy lifting” to help accomplish this year’s economic growth target amid growing external challenges.

Rate cuts will likely add to the pressure on Chinese banks

Lynn Song, ING

“[The] moves mark the first change in rates since February, and also the first major move since announcing a shift in the monetary policy framework in June,” said Lynn Song, chief economist for Greater China at ING.