China's central bank cut benchmark interest rates for the third time in 2024 as it steps up efforts to reduce borrowing costs and boost economic growth.
A 25-basis-points cut to both the one-year and five-year loan prime rates (LPR) was announced on Oct. 21. Following the cuts, the one-year LPR, the common benchmark for corporate and household loans, stands at 3.10% while the five-year LPR, the mortgage benchmark, is 3.60%, its lowest level ever.
The rate cuts "confirms a policy pivot toward further monetary easing aimed at revitalizing the economy," said Yating Xu, principal economist at S&P Global Market Intelligence. Xu expects a further reduction in the banks' reserve requirement ratio in 2024 and another interest rate cut in early 2025.
The property sector is "expected to be the primary beneficiary" of the recent stimulus package that includes cuts to both mortgage and down payment rates, along with the government's announcement that it will purchase land and existing housing estates, Xu said. The measures will revive growth in the fourth quarter of 2024 and help avoid a sharp deceleration in 2025, Xu added.
Property boost
In late September, the government announced a series of measures that included allowing homeowners to renegotiate with their banks to reduce interest rates on existing mortgages and lowering the down payment requirement on second homes to 15% from 25%, bringing it in line with that for first homes. The banks' reserve requirement ratio was also cut by 50 basis points to boost liquidity.
The world's second-largest economy reported GDP growth of 4.6% for the third quarter of 2024, compared with 4.7% in the prior quarter and behind the government's annual target of around 5.0%. In September alone, the multiyear downturn in the housing market dragged on the economy while China's exports growth was at its slowest for five months, increasing just 2.4% year over year.
"While the move has been fully expected and indicated by policymakers, the sizable cuts to both LPRs still signaled that the PBOC is pushing hard on its mandate to lower overall borrowing costs," said Harrington Zhang, China economist at Nomura, in a Oct. 21 note. "This is the single largest cut to the one-year LPR and one of the two largest cuts to the five-year LPR since the LPR reform in August 2019," Zhang noted.
"We continue to expect Beijing to introduce fiscal stimulus of two to three trillion yuan in coming months," Zhang said, adding the upcoming National People's Congress Standing Committee meeting could be the policy window. The meeting is expected in November.