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China Cuts Benchmark Lending Rates

China’s central bank on Monday reduced its benchmark lending rates, as widely expected, as the economy contracted for the first time at least since 1992 amid coronavirus outbreak.

The one-year loan prime rate was lowered by 20 basis points to 3.85 percent and the five-year loan prime rate was cut by 10 basis points to 4.65 percent.

The loan prime rate is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This new lending rate replaced the central bank’s traditional benchmark lending rate in August 2019.

The People’s Bank of China last week reduced its one-year medium-term lending facility, or MLF, rate to 2.95 percent from 3.15 percent and injected CNY 100 billion through the MLF operation.

In March, the PBoC had reduced the reserve requirement ratio for qualified banks and the reverse repo rate.

September should mark the point when the PBoC hits the “ultra-low” interest rate level, Iris Pang, an ING economist said.

After that, the PBoC may need to rely more on reserve requirement ratio cuts than rate cuts. The PBoC may use RRR cuts more than rate cuts before September to delay its policy rates touching ultra-low levels, the economist noted.

The economy shrank 6.8 percent on a yearly basis in the first quarter, which was the first decline since the nation began reporting quarterly data in 1992. The economy had expanded 6 percent in the fourth quarter of 2019.

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