The People’s Bank of China (PBOC) has announced a slight reduction in its one-year loan prime rate by 10 basis points, bringing it down to 3.45% from the previous 3.55%. However, the bank has chosen to keep the five-year rates unchanged at 4.20%, which significantly influence mortgage rates.
This decision has left many disappointed, as they had anticipated a more substantial 15-basis-point reduction for both rates. China is currently grappling with a deepening crisis in its property sector, which is causing destabilizing effects on the world’s second-largest economy.
As a result of the smaller-than-expected rate cut, the USD/CNY currency pair experienced a 0.7% decline to 7.2305. This outcome has contributed to the yuan’s recovery after the pair briefly crossed the significant threshold of 7.3, just below its highest level since August 2022.
The Chinese central bank finds itself in a challenging predicament, needing to provide economic stimulus while facing downward pressure on the yuan. This dilemma limits its capacity for more aggressive monetary easing, as a more pronounced expansion of China’s yield differentials could trigger capital outflows.
Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment,” noted analysts at ING in a statement. They further remarked that this trend has gained prominence, especially after the Fed minutes had minimal implications for central bank expectations, and the calendars of developed markets are relatively light.