China made its biggest-ever cut in mortgage rates on Tuesday, as authorities try to support the struggling property sector, although the response from stock markets was weak.
The People's Bank of China said the country's lenders will cut the base interest rate on five-year loans by 25 basis points to 3.95%, a bigger cut than expected and the first since June last year. The one-year LPR rate was maintained at 3.45%.
Wei Yao, an economist at Société Générale, said lowering borrowing costs was a “logical imperative” as Beijing struggles to support an economy reeling from a property market collapse that has weighed on consumer sentiment amid sluggish growth and a deflationary environment.
“This rate is particularly important for the housing sector because it is the reference rate for home mortgages and long-term corporate loans,” Yao added. “It is clear that the People's Bank of China wants to direct easing to the housing market, which continued to weaken at the beginning of the year.”
The easing of monetary policy is just the latest in a number of moves by the Chinese government to lift investor sentiment after the Shanghai Composite Index CN:SHCOMP hit a five-year low at the start of February.
In recent weeks, Beijing said it would support the stock market by encouraging government-linked funds to buy shares, and on February 7, it replaced the head of its securities regulator with a veteran considered more market-friendly.
However, response to Tuesday's rate cut news was weak, with the Shanghai Composite Index rising 0.4% and Hong Kong's Hang Seng Index (HK:HSI) rising 0.5%.
Stephen Innes, managing partner at SPI Asset Management, said Beijing's latest move shows the government is stepping up efforts to stabilize the stock market and promote economic recovery amid ongoing challenges, but more is needed.
To be sure, Beijing has put together a rescue package aimed at buying up stocks, suggesting a proactive approach to addressing market turmoil. “The breadth of measures is encouraging but will likely lead to another set of calls for further fiscal and monetary stimulus,” Innes said.
