In a bid to jolt its flagging economy back to life, China’s central bank has taken a drastic step – slashing two key interest rates to their lowest levels ever. This bold move, announced on Monday, comes as the world’s second-largest economy grapples with sluggish spending and a disappointing third-quarter growth report.
The one-year Loan Prime Rate (LPR), which serves as a benchmark for lenders offering the most competitive rates to businesses and individuals, has been cut from 3.35 percent to 3.1 percent. Meanwhile, the five-year LPR, used to determine mortgage loan rates, has been reduced from 3.85 percent to 3.6 percent. These rates were last adjusted in July, and their current levels represent historic lows.
China’s leaders have set a target of five percent annual growth for 2023, but this goal appears increasingly challenging due to persistent weak demand, sluggish consumer spending, and the lingering effects of a major debt crisis in the country’s property sector. Despite the gloomy outlook, Beijing has expressed unwavering confidence in achieving its growth target. However, economists believe that more direct fiscal stimulus is crucial to revitalize economic activity and restore business confidence.
Data released on Friday revealed that China’s economy expanded by 4.6 percent in the third quarter, marking its slowest pace in a year and a half. Government officials acknowledged a “complicated and severe external environment… as well as new problems of domestic economic development.” This disappointing performance came after weeks of anticipation surrounding a much-needed stimulus plan, but investors remain cautious, waiting for concrete details.
To further boost spending, leading banks in China have slashed rates on yuan deposits for the second time this year. The central bank governor, Pan Gongsheng, indicated on Friday that the authorities are considering a further reduction in the reserve requirements for commercial lenders before the year’s end. This move aims to free up additional funds for lending and stimulate economic activity.
The prolonged period of sluggish spending has ignited concerns about a potential return to deflation in China. The country emerged from a period of falling prices earlier this year. Monday’s rate cut was met with cautious optimism. “The monetary policy has clearly shifted to a more supportive stance since the press conference on September 24. The real interest rate in China is too high,” said Zhang Zhiwei, President and Chief Economist of Pinpoint Asset Management, according to AFP. This move, he added, was “an encouraging sign.”
China’s economic trajectory remains uncertain. The central bank’s drastic interest rate cuts demonstrate the urgency of its efforts to revive growth. Whether these measures will be sufficient to overcome the challenges facing the economy remains to be seen.