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China cuts benchmark mortgage rates more than expected to support struggling property market

The announcement of China’s largest-ever reduction in the benchmark mortgage rate reflects the government’s efforts to support the struggling property market and stimulate the broader economy. Here are some key points from the information you provided:

The five-year Loan Prime Rate (LPR) was cut by 25 basis points to 3.95%, down from the previous rate of 4.20%. The one-year LPR remained unchanged at 3.45%.

This 25-basis point cut in the five-year LPR is the largest since the reference rate was introduced in 2019, signaling a significant policy move. The last reduction in the five-year LPR occurred in June 2023, with a 10 basis points cut.

Economists interpret this action as the beginning of what could be the largest interest rate cut cycle in history. The move is expected to have a direct impact on the real estate sector by reducing mortgage costs.

Most new and existing loans in China are tied to the one-year LPR, while the five-year rate influences mortgage pricing. This suggests that the rate cut could lead to lower borrowing costs for homebuyers and property developers.

The stronger-than-expected rate cut suggests that Beijing is less concerned about potential negative effects on the currency or banks compared to the previous year. This signals a shift in priorities, indicating that supporting economic growth and the property market has become a more immediate concern.

Media reports suggest that the benchmark mortgage rate cut is not expected to negatively impact banks’ net interest margins. This could indicate that authorities are taking measures to minimize adverse effects on the banking sector.

The announcement implies that the impact from rate cuts in other major economies, which were expected to occur, is fading. This provides more leeway for Beijing to implement monetary policy measures to support its economy.

Overall, this move is a significant policy shift aimed at addressing economic challenges, particularly in the property market, and could mark the beginning of an extensive interest rate cut cycle.