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China announced its biggest ever reduction in the benchmark mortgage rate in the latest effort to prop up the struggling property market and broader economy.
The five-year benchmark lending rate loan prime rate (LPR) was lowered by 25 basis points to 3.95% from 4.20% previously, while the one-year LPR was left unchanged at 3.45%.
The 25-basis point cut was the largest since the reference rate was introduced in 2019 and far more than analysts had expected. China last trimmed the five-year LPR in June 2023 by 10 basis points.
Most new and existing loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
“This is the biggest signal. In other words, the largest interest rate cut cycle in history has begun,” said Yan Yuejin, analyst at E-House China Research and Development Institution. The cut will directly impact the real estate sector by lowering mortgage costs, he said.
A central bank-backed newspaper said on Tuesday that the benchmark mortgage rate cut would not create a negative impact on banks’ net interest margins.
Meanwhile, easing spillover effects from other major economies, particularly the US where the Federal Reserve is now expected to cut rates, provides Beijing with more room to provide more monetary policy support.
Still, authorities are likely to remain wary of pressure on the yuan from lower domestic rates. The Chinese currency fell to its lowest since Nov. 20 after the LPR announcement but has since trimmed losses.
Beijing has stepped up efforts to rescue the ailing property sector, but the measures have come in fits and starts, weighing heavily on a sector that drives a quarter of the economy and on the stock market. New home prices saw their worst declines in nine years in 2023, while the stock market is languishing after hitting five-year lows.
Government-backed media last week reported that state banks have boosted lending to residential projects under the “white list” mechanism aimed at injecting liquidity into the crisis-hit sector.
Recent deposit rate cuts and the reduction to bank reserves are giving commercial banks space to reduce borrowing costs to support the economy.
While the new mortgage reference rate comes into effect immediately, existing mortgage holders will not benefit from any reduction in loan repayments until next year, as mortgage rate repricing is on a yearly basis.
The LPR, which banks normally charge their best clients, is set by 20 designated commercial banks who submit proposed rates to the central bank every month.