China’s Central Bank Cuts Lending Rate to Aid Economy

China’s Central Bank cut a benchmark lending rate on Tuesday to boost economic growth in the country. The People’s Bank of China reduced the five-year loan prime rate from 4.2% to 3.95%. However, the one-year loan prime rate, which serves as a benchmark for corporate loans, remains the same at 3.455.

Notably, the five-year loan prime rate was last lowered in June, while the one-year LPR was last cut in August. According to reports, these are the largest reductions in rates since their introduction in 2019, and both rates are the lowest in history.

In January 2024, China announced it would cut the Reserve Requirement Ratio (RRR) in banks to defend markets and increase growth. The recent move aims to encourage commercial banks to provide more credit at better rates. Unlike other economies that are increasing rates to control inflation, China has done the exact opposite.

In 2023, the country reported one of its worst annual growth rates since 1990, lowering the possibility of a quick economic recovery after the end of severe COVID restrictions in late 2022. China is struggling with several challenges, such as the persisting property sector crisis and the increase in unemployment among youth. Last month, consumer prices fell rapidly, at the fastest rate in the last 14 years. Therefore, the Chinese government has been put in a position to take active measures to revive the dying economy. 

The deflation in the Chinese economy can put a pause on the profits earned by companies, ultimately impacting employment and demand in the industry in the long term. Policymakers have taken several steps in order to increase consumption. However, these measures have not really worked in their favour, as there has been very little impact.

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