China on Monday announced the expected Loan Prime Rate (LPR) reduction, with both short- and long-term rates cut by the same margin, marking the largest cut since the LPR was introduced as the benchmark in China’s interest rate mechanism reform.
The People’s Bank of China (PBOC) announced that the 1-year LPR is lowered to 3.1%, and the 5-year LPR to 3.6%, both cut by 25 basis points from the previous month.
This is the third LPR reduction this year and marking the largest reduction in long-term rates since the LPR mechanism reform.
Three days earlier, PBOC Governor Pan Gongsheng had said at a forum that the LPR would decrease by “0.2-0.25 percentage points’ and the actual reduction reached the upper limit of Pan’s forecast.
The 25 basis point cut in both the 1-year and over-5-year LPR, a relatively large cut, is expected to lower loan rates for businesses and households, support economic growth, and drive the recovery of demand, said a source close to the central bank.
The latest LPR cut shows the central bank’s interest rate policy transmission mechanism is functioning effectively, the source stressed.
The PBOC on September 27 lowered its policy rates, including cutting the 7-day reverse repo rate by 0.2 percentage points to 1.5% from 1.7% and cut the Medium-Term Lending Facility (MLF) rate by 0.3 percentage points and on October 18, major commercial banks lowered the interest rates on deposit products. Now the LPR has been reduced, which effectively reflects the change in the PBOC’s policy rates, indicating improving transmission of interest rates and monetary policy, the source said.
This LPR reduction is expected to significantly reduce mortgage interest payments for households, easing the burden on borrowers.
Since the beginning of 2024, the 5-year LPR has decreased by a total of 60 basis points, benefiting both new and existing mortgage borrowers. For those planning to take out a home loan, the interest cost will be lower and for existing mortgage holders, the 0.6 percentage point drop in the LPR this year, combined with the average 0.5 percentage point reduction in existing mortgage rates to be implemented by commercial banks by October 25, means that the mortgage rate could decrease by more than 1 percentage point this year.
The financial regulators announced a package of measures on September 24 to support economic stability and the PBOC has largely implemented these policies. This includes lowering the reserve requirement ratio by 0.5 percentage points, cutting the reverse repo rate, MLF rate, and LPR, and reducing deposit rates. Additionally, further reserve requirement cuts of 0.25 to 0.5 percentage points may be considered before the end of the year. Several real estate financial policies have also been introduced, and measures to stabilize the capital markets, including stock repurchase programs and special loans, are now in place.
