China trims lending rates with new benchmark, more rate cuts expected

China lowered its new lending reference rate slightly on Tuesday, as expected, as the country’s central bank kicked off new interest rate reforms designed to lower corporate borrowing costs.

But the tiny reduction in the revamped Loan Prime Rate (LPR), which is calculated from price contributions from selected banks, reflects lenders’ reluctance to reduce loan rates. That has fueled expectation Beijing will need to take more steps to guide borrowing costs lower in a struggling economy.

The new one-year LPR was set at 4.25% on Tuesday, down 6 basis points from 4.31% previously. It was 10 basis points lower than the PBOC’s existing benchmark one-year lending rate.

“While this should nudge banks to reduce lending rates slightly, the impact on economic activity will be marginal,” Capital Economics Senior China Economist Julian Evans-Pritchard said in a note. “A decline of only a few basis points is small.”

He also said the PBOC would need to take other steps, including cuts to medium-term liquidity rates, if it wants to continue reducing the LPR to lower funding costs for banks.