The People's Bank of China surprises by reducing interest rates: a boost for the economy in crisis?

The People's Bank of China (PBC) has taken financial analysts by surprise by announcing a ten basis points reduction to its one-year loan prime rate (LPR) reference rate. This move will decrease the rate from 3.45% to 3.35%, a change that was not anticipated by the majority of experts. The LPR, established in 2019, serves as an indicator for setting the pricing of new loans, mostly aimed at businesses, and loans with variable interest rates. The last time the one-year LPR was adjusted was in August 2023, when it was reduced from 3.55% to 3.45%. This reduction comes in a global context of economic uncertainty, with other powers keeping their interest rates high to combat inflation. However, Chinese authorities have opted for this measure to reduce borrowing costs and support the real economy. In addition to the reduction in the one-year LPR, the PBC has also announced a cut in the LPR for five years or more, moving from 3.95% to 3.85%. This decision could be related to the attempt to revive a crisis-ridden real estate market, following the guidelines of the Chinese Communist Party to prevent risks in this sector. To facilitate liquidity injections into the economy, the Chinese central bank has also lowered the interest rates on its 7-day reverse repurchase agreements ('repos') from 1.8% to 1.7%. This measure aims to strengthen counter-cyclical regulation and provide greater financial support to the real economy in a complicated global economic context. Furthermore, the PBC has announced a reduction in the collateral required for banks and financial institutions for medium-term loan service credits. This measure, which reduces the cost of borrowed money for banks, aims to increase the scale of negotiable bonds and alleviate pressure in the bond market. These announcements from the People's Bank of China come at a time when the global economy faces significant challenges, such as escalating trade tensions and uncertainty about the impact of the pandemic on economic recovery. The decision to reduce interest rates and facilitate liquidity shows the Chinese authorities' willingness to boost economic growth and stabilize financial markets in a volatile global environment. In a context of growing economic and financial pressures, the response of the People's Bank of China aims to mitigate negative effects and strengthen the national economy. However, it remains to be seen how these measures will impact long-term economic development and whether they will achieve the desired objectives in a scenario of global uncertainty.