Why Did China Cut Interest Rate In December?

China’s central bank cut its main interest rate for the first time in 20 months, as authorities step up efforts to boost the economy that has been hit by pandemic-related curbs, a real estate slump and an unprecedented crackdown on private enterprises.

The People’s Bank of China on Monday lowered its one-year loan prime rate by 5 basis points to 3.8%. The LPR is the rate at which commercial banks lend to their best customers and it serves as the benchmark rate for other loans.

While Monday’s rate cut is small, it’s the first such move since April 2020, when China slashed the rate to boost its COVID-hit economy, which had just contracted for the first time in more than 40 years.

The cut reinforces the view that authorities are increasingly open to cutting interest rates amid looming economic headwinds.

A cut to the lending rate can help reduce borrowing costs for households and firms and in turn encourage consumer spending and investment.

Unlike the West, Beijing had refrained from flooding the economy with stimulus packages during the pandemic, focusing instead on offering targeted support to smaller businesses.

China was the only major economy to record growth in 2020, but this year the country’s expansion has been hit by several factors, forcing it to consider ways to provide support even as other major central banks withdraw stimulus and raise interest rates to fight inflation.