By WANG Yu

A new round of interest rate cuts has been initiated, but this time it’s an asymmetric reduction. 

The People’s Bank Of China (PBC) announced the latest Loan Prime Rate (LPR) adjustments on August 21. The 1-year LPR was lowered from 3.55 percent to 3.45 percent, while the LPR for 5 years and above remained unchanged at 4.2 percent.

The decision to keep the 5-year rate unchanged dashed hopes for decreased rates on housing and corporate loans, which rely on longer-term LPR. The emphasis of this rate cut seems to be on reducing short-term funding costs, and stimulating domestic demand and consumption while maintaining stability for medium to long-term loans like personal housing mortgages and corporate loans.

With the 1-year LPR declining, various short-term loan rates closely linked to the LPR will see new adjustments. Short-term corporate financing and consumer loan rates are expected to decrease, directly reducing corporate financing costs, boosting personal credit demand, and encouraging consumer spending and investment.

This marks the PBC’s second LPR reduction this year, with the 1-year LPR lowered from 3.65 percent to 3.55 percent two months ago. The LPR for 5 years and above had previously been lowered from 4.3 percent to 4.2 percent.

The movement of the LPR has been anticipated since mid-August when the PBC conducted operations like the Medium-term Lending Facility (MLF), prompting expectations of an interest rate cut. The promotion of MLF was believed to pave the way for the LPR reduction, aligning policy tools.

This latest rate cut focuses more on short-term funding cost reduction rather than the long-term, as indicated by the unchanged 5-year LPR. While this move may disappoint expectations for reduced housing loan costs, it’s expected that cities will promote home purchases.

The real estate market has experienced fluctuations this year, and a rate cut alone might not be sufficient to stimulate the market. A longer-term trend of lower housing loan rates is anticipated, with banks continuing to lower rates and accommodate the market.