The largely-expected reduction in the one-year Loan Prime Rate (LPR), now at 4.20%, came after the People's Bank of China (PBOC) lowered banks' reserve requirements on Monday. It also comes shortly after the Federal Reserve cut US interest rates by 25 basis points (bps). The one-year LPR dipped to 4.20% at its monthly fixing on Friday, 5 bps lower than 4.25% in August. The five-year LPR was unchanged at 4.85%.
"The PBOC is experimenting with this new system. They are lowering rates very gradually and trying to measure the impact and see where the money flows as a result," said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management in Tokyo. Iris Pang, Greater China economist for ING in Hong Kong, said the move "is not a growth-stimulation story, I think it is more a protection story, to not fall into a weaker growth range. Growth has been very weak and this is more for lowering interest costs for production and infrastructure."
Friday's cut was the second for the one-year LPR, a lending reference rate set by 18 banks that the PBOC revamped last month, loosely pegging it to the rate on its medium-term lending facility (MLF). The MLF rate, at 3.3%, was last cut in early 2016. A lower LPR could translate to lower borrowing costs for companies and consumers in a slowing economy.