Significant interest rate cuts, just what the market needs

China's central bank announced the largest cut to a benchmark mortgage rate in recent years on Tuesday, lowering the over-five-year loan prime rate (LPR) by 25 basis points to 3.95 percent.

Although the market was widely expecting a rate cut, such a huge reduction was beyond people's expectations. Hopefully, the cut can trigger an extensive rise in the country's stock market.

At a time when economic growth is facing great uncertainty, the effective and measured monetary policy coordination from the monetary authorities has become particularly important. In 2023, the central bank introduced a series of rate cuts, lowering the medium-term lending facility and seven-day reverse repo rates several times, something that the market interpreted as a move to guide the downward adjustment of the LPR.

The rate cut is undoubtedly a boon for a large number of economic entities who will see a direct decline in their financing costs, helping lubricate the economic circulation.

China now has a large number of small and medium-sized enterprises engaged in foreign trade, but the volatile changes in the international situation have affected their operation. For a long time, financing difficulties and high financing costs have affected the development of the private economy. The rate cut will alleviate the funding and financing pressure of a large number of enterprises.

Not only for enterprises, for millions of households, too, the rate cut means a reduction in repayment pressure. For most homebuyers who have to pay mortgage for over five years, the latest LPR cut will directly reduce their repayment costs, thus alleviating their economic burden.

Actually the central bank had mentioned before Spring Festival that there is a gap between the current inflation level and the target, and the country needs to further reduce real interest rates. It can be expected that the rate cut will play a positive role in stimulating the financing demand of the real economy and stabilizing economic growth.

Judging from market feedback and the actions of global central banks, there is high probability that China's central bank will continue to promote monetary policy loosening in 2024.