China's central bank has cut its one-year loan prime rate for the second time in three months as the economy struggles to recover from the pandemic, with challenges including a property crisis, falling exports, and weak consumer spending.
China's economy is facing a downward spiral due to a crisis in the debt-laden property sector, prompting seven city banks to reduce their growth forecasts for the country; concerns include falling into deflation, high unemployment rates, and the need for more proactive government support.
China's decision not to cut its five-year loan prime rate to revive the real estate sector and boost the economy is expected to have a limited impact and further weaken confidence, according to economists.
The majority of economists polled by Reuters predict that the U.S. Federal Reserve will not raise interest rates again, and they expect the central bank to wait until at least the end of March before cutting them, as the probability of a recession within a year falls to its lowest level since September 2022.
China's big five state-owned banks are expected to see a decline in revenue and narrower net interest margins as they face challenges such as low credit demand and pressure to support the economy amid a debt crisis in the property sector.
China's economic slowdown, marked by falling consumer prices, a deepening real estate crisis, and a slump in exports, has alarmed international leaders and investors, causing Hong Kong's Hang Seng Index to fall into a bear market and prompting major investment banks to downgrade their growth forecasts for China below 5%.
Chinese shares dropped as banks in the country cut interest rates less than expected, with the benchmark one-year loan prime rate being lowered by 0.1 percentage point to 3.45%.
China's one-year loan prime rate is slashed by 10 basis points, while the five-year rate remains unchanged, leading to mixed performance in Asia-Pacific markets, with Hong Kong's Hang Seng index slipping 1.8%, mainland Chinese markets in negative territory, and other markets on the rise; meanwhile, Thailand's economy expands by 1.8% in Q2, lower than expected.
China's economy is at risk of entering a debt-deflation loop, similar to Japan's in the 1990s, but this can be avoided if policymakers keep interest rates below a crucial level to stimulate economic growth.
Despite concerns over rising deficits and debt, central banks globally have been buying government debt to combat deflationary forces, which has kept interest rates low and prevented a rise in rates as deficits increase; therefore, the assumption that interest rates must go higher may be incorrect.
The Bank of England may have to increase interest rates if the US Federal Reserve decides to raise rates to cut inflation, in order to prevent the pound from weakening and inflation from rising further.
Chinese state-owned banks are expected to lower interest rates on existing mortgages, with the quantum of the cut varying for different clients and cities, in an effort to revive the property sector and boost the country's economy.
Global interest rate hikes, challenges in China, a stronger dollar, and political instability in Africa have impacted emerging market assets, causing stock and currency declines and property market concerns in China, while Turkey's markets have seen a boost in response to interest rate hikes, and African debt markets have experienced a significant pullback.
China's economic slowdown is being caused by a property market downturn, softening demand for exports, and low household spending, which poses risks to financial stability and could lead to deflation and deeper debt problems. Economists are uncertain if the government's current measures, like interest rate cuts, will be enough to boost consumption and meet growth targets. Structural reforms and measures to increase household consumption are needed to address the imbalance in the economy.
China's central bank will cut the amount of foreign exchange reserves required for financial institutions, in an effort to slow the decline of the yuan.
Emerging-market central banks are resisting expectations of interest rate cuts, which is lowering the outlook for developing-nation bonds, as central banks in Asia and Latin America turn hawkish in response to the "higher-for-longer" stance taken by the Federal Reserve, currency pressures, and the threat of inflation.
Central banks across major developed and emerging economies took a breather in August with lower interest rate hikes amid diverging growth outlooks and inflation risks, while some countries like Brazil and China cut rates, and others including Turkey and Russia raised rates to combat currency weakness and high inflation.
Poland's central bank unexpectedly cuts its main interest rate by 75 basis points to 6.00% ahead of October elections, causing the zloty currency to plummet and raising concerns about inflationary risks.
Five major state banks in China, including ICBC and China Construction Bank, will lower interest rates on existing mortgages for first-home loans as part of support measures to aid homebuyers and stabilize the property sector.
Poland's central bank governor justifies the large interest rate cut despite high inflation, stating that prices are stabilizing.
China's measures to support the property sector are lowering monthly mortgage payments for homeowners but also reducing interest earnings on bank deposits, highlighting the challenge of promoting consumer spending in a weak economic climate.
The Wall Street Journal reports a notable shift in the stance of Federal Reserve officials regarding interest rates, with some officials now seeing risks as more balanced due to easing inflation and a less overheated labor market, which could impact the timing of future rate hikes. In other news, consumer credit growth slows in July, China and Japan reduce holdings of U.S. Treasury securities to record lows, and Russia's annual inflation rate reached 5.2% in August 2023.
The Federal Reserve is expected to cut interest rates by about one percentage point next year as economic growth slows and unemployment rises, according to chief economists at major North American banks.
The Brazilian government expects the central bank's benchmark interest rate to be cut by at least 50 basis points over the next three meetings, with the goal of ending 2023 with a rate below 12%.
China's central bank will take measures to boost demand, support price rebound, and create a favorable monetary and financial environment to enhance economic vitality, according to an unnamed senior central bank official.
The European Central Bank has implemented its 10th consecutive interest rate increase in an attempt to combat high inflation, although there are concerns that higher borrowing costs could lead to a recession; however, the increase may have a negative impact on consumer and business spending, particularly in the real estate market.
China's economy is facing challenges due to its real estate crisis and high levels of mortgage debt, but the government is hesitant to provide fiscal stimulus or redistribute wealth, instead aiming to rely on lending to avoid a potential recession. Banks have cut interest rates and reserve requirements, but it is unlikely to stimulate borrowing. However, economists predict that policymakers will intensify efforts in the coming months, such as changing the definition of first-time home buyers and implementing property easing measures, to address the economic downturn.
Chinese commercial banks are concerned that the central bank's recent cut to mortgage rates will not be enough to prevent a surge in mortgage prepayments, which could squeeze bank margins.
High mortgage rates have frozen the US housing market, but experts predict that the Federal Reserve may cut interest rates in the next 12 to 18 months, potentially leading to a decline in mortgage rates.
Wall Street fears that the Federal Reserve will push out the timing for rate cuts next year, sparking concerns of a hawkish pause and increasing selling pressure, despite a trend of rapid disinflation and the potential for a higher neutral interest rate.
