China's central bank slashes benchmark lending rate to stimulate economic growth

China's central bank cut a key benchmark lending rate used to price mortgages on Tuesday, aiming to boost its slowing growth and counter rate hikes in other major economies. The five-year loan prime rate (LPR) was reduced from 4.2 to 3.95, as per the People's Bank of China.

However, the one-year LPR, a benchmark for corporate loans, remained unchanged at 3.45 percent, news agency AFP reported.

These rates, closely monitored by markets, are at historic lows. The move is designed to encourage commercial banks to offer more credit at better rates, contrasting with most other major economies raising rates to control inflation.

As per government data, China's housing mortgage loans stood at 38.2 trillion yuan or US$5.3 trillion at the end of December. The world's second-largest economy has rolled out several measures to help its ailing real estate sector. 

Some of these measures include setting up an urban real estate financing coordination mechanism, extending government credit more than 160 billion yuan or US$22.2 billion to real estate projects.

As per the National Bureau of Statistics, sales area of commercial housing was 1.12 billion sq. metres (12.06 billion sq ft) last year, a drop of 8.5 per cent from the previous year. Residential sales area dropped by 8.2 per cent.

China, the world's second-largest economy, is showing mixed indicators. It reported one of its worst annual growth rates since 1990 last year, dimming hopes for a quick economic recovery post the end of severe Covid restrictions in late 2022.

The country is grappling with various challenges such as a lingering property-sector crisis, rising youth unemployment and a global slowdown impacting demand for Chinese goods. In January, consumer prices fell at their fastest rate in over 14 years, prompting calls for more aggressive steps to rejuvenate the ailing economy.

Deflation can impact the profitability of companies and harm employment and demand in the long term. Last month, Beijing announced a reduction in the amount banks must hold in reserve, known as the reserve requirement ratio (RRR).

(With agency inputs)