SHANGHAI (Reuters) – The People’s Bank of China (PBOC) on Tuesday made an unprecedented cut in its prime five-year loan rate, which influences the cost of real estate loans, a decision that is in line with the wishes of decision-makers in Beijing to revive the real estate market and stimulate the economy.
The five-year prime loan rate (LPR) was reduced by 25 basis points, to 3.95% from 4.20% previously. The one-year rate was left unchanged at 3.45%.
This is the biggest drop in the five-year LPR since the rate was implemented in 2019. Analysts had expected China’s central bank to cut the rate, but by less magnitude.
“This is the major signal. The biggest rate cut cycle in history has begun,” commented Yan Yuejin, an analyst at E-House China Research and Development Institution.
The BPC’s decision will directly impact the real estate sector by reducing borrowing costs, he added.
For the most part, new loans and outstanding loans in China are based on the one-year interest rate, while the five-year rate influences the cost of real estate loans.
In a Reuters poll of 27 market observers this week, 25 participants said they expected China’s central bank to cut its prime five-year lending rate. They expected a drop of 15 basis points.
The yuan fell to its lowest level since November 20 before erasing part of its losses. The real estate sector has progressed.
The previous reduction in the five-year LPR dates back to June 2023. The BPC then carried out a reduction of 10 basis points.
Many analysts and investors expect more measures to support consumption and prices in the real estate market. The decision by Chinese authorities to replace the head of the financial market regulator has fueled their hopes.
“It’s more of a signal,” Ben Bennett, a strategist at Legal and General Investment Management in Hong Kong, said of the PBOC’s move.
“Most people don’t buy a house because of high borrowing costs, worry about developer bankruptcies…,” he added. “But it signals a determination to support the property market.”
If the new preferential rate comes into force immediately, it will only be applied next year to existing contracts.
(Reporting Winni Zhou and Tom Westbrook; Jean Terzian)
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