The People's Bank of China is walking a tightrope in its efforts to revive growth. Offering too much of stimulus could add to inflation pressures and risk capital flight as the Federal Reserve and other economies raise interest rates aggressively.
The one-year LPR was last reduced in January. The five-year tenor, which was last lowered in May, influences the pricing of home mortgages. The LPR cuts come after the PBOC surprised markets last week by lowering the medium term lending facility rate and another short-term liquidity tool, as a string of recent data showed the economy was losing momentum amid slowing global growth and rising borrowing costs in many developed countries.
In a Reuters poll conducted last week, 25 out of 30 respondents predicted a 10-basis-point reduction to the one-year LPR. All of those in the poll also projected a cut to the five-year tenor, including 90% of them forecasting a reduction larger than 10 bps.China's economy, the world's second biggest, narrowly avoided contracting in the second quarter as widespread COVID lockdowns and a property crisis took a heavy toll on consumer and business confidence.
Goldman Sachs lowered China's 2022 full-year GDP growth forecast to 3.0% from 3.3% previously, far below Beijing's target of around 5.5%. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a recent high profile policy meeting. Capital Economics' Yue said the weakness in loan demand is partly structural,"reflecting a loss of confidence in the housing market and the uncertainty caused by recurrent disruptions from China's zero-COVID strategy".Sources last week told Reuters that China would guarantee new onshore bond issues by a few select private developers to support the sector, which accounts for a quarter of the national GDP.