China’s central bank has surprised markets by cutting its one-year interest rate as authorities in the nation of 1.4 billion people try to reinvigorate a slumping economy.
However, in an equally surprising move, China’s central bank kept its five-year interest rate unchanged due to concerns about a weakening currency.
China, which is the world’s second biggest economy after the U.S., has seen its economy sputter coming out of the Covid-19 pandemic due to a deteriorating property market, weak consumer spending, and dismal credit growth.
Government officials in Beijing have talked publicly about the need to stimulate the Chinese economy to reverse the current downturn.
However, downward pressure on the yuan currency means that Beijing has limited room to enact deep monetary easing, according to economists.
Any widening of China’s yield differentials with other major economies could trigger a selloff in the yuan currency and lead to a flight of capital from the country, warn economists.
Consequently, China’s central bank lowered its one-year loan prime rate (LPR) by 10 basis points to 3.45% from 3.55%, while the five-year interest rate was left unchanged at 4.20%.
Most new and outstanding loans in China are based on the one-year interest rate, while the five-year rate mostly influences the price of home mortgages.
China’s central bank previously cut both its one and five-year interest rates in June of this year.
China’s yuan currency has lost nearly 6% of its value against the U.S. dollar so far this year and is one of the worst performing currencies in Asia.