The CBC issued a notification about low interest on mortgage loans. In a Reuters survey, economists said that most participants expected the rate on one-year MLF to remain unchanged. Eight said it would cut the rates on seven-day reverse repurchase agreements. This move will limit real bottlenecks in the property market but will not ease macroeconomic pressures.
This move follows cuts in rates on other major monetary policy parameters. In addition to the reduction in short-term lending rates, China also cut its medium-term lending rates to prop up the economy. Its vice-governor also hinted that the rate would be cut further in the first half of 2019. As a result, property firms’ shares spiked on the news of the easing.
The move comes as the country struggles with a weak economy. Local and international banks have multiple ways of calculating interest rates. Corporate accounts with BG and LC facilities typically have to pay a higher rate of interest for their credit facilities. The MLF rate cut has increased the risk of a downturn in the economy.
Bank work the interest rate is based on the purpose of the loan and demand for money is based on a maturity value certificate. It offers a negotiated amount based on the maturity value.
Its easing policies are largely aimed at providing more liquidity to lenders. The decision has helped the economy and the markets.
The move comes after weak December economic data. It comes amid reports showing a slowdown in the property sector and weak consumption. Both of these areas are major drivers of growth in the country. The monetary authority has already cut rates on one-year loans by 10 basis points, to 3.70 percent. Moreover, the five-year LPR has been reduced by five basis points to 4.60%.
In other news, the PBOC cut rates on its medium-term loan facility. The cut was meant to keep the banking system’s liquidity levels adequate. Despite this, the amount of long-term liquidity remained at 1 trillion yuan. This helped in supporting the post-COVID economic recovery. However, the yuan is losing momentum, and currency traders say this move will only slow the growth rate further. But the lower RRR will not necessarily lead to a higher price level. Rather, the cut will help stabilize the economy and help stabilize its currency.
While the Chinese government has cut the prime rate on one-year loans twice in the past year, the PBOC still faces risks to the economy. The government’s financial stability may be at stake in a large-scale default on loans, but the country’s economy is a major exporter of raw materials. A shortage of raw materials could hit the country’s prices. The PBOC’s policymakers are trying to reduce the risk of inflation by making the necessary changes on three fronts. The first two measures involve tightening the local government’s spending and financing practices.