China is set to slash two of its key lending rates the most this year, as pressure rises on officials and banks to reverse weakening momentum and restore sagging demand in the world’s second-largest economy.

Following an unexpected decrease to its closely related medium-term financing rate last week, the People’s Bank of China is set to announce reductions in both one-year and five-year loan prime rates, which affect borrowing costs for firms and families, at its monthly meeting on Monday.

Since eliminating epidemic restrictions at the start of the year, Beijing policymakers have faced a slew of obstacles, including a slowing property market, lower exports, record youth unemployment, and price deflation as consumer confidence dwindles.

The PBoC advised banks to enhance lending to businesses in order to boost growth and stimulate demand in a statement issued on Sunday. The statement was issued in conjunction with a meeting of China’s finance and securities authorities on Friday to examine the country’s “tortuous” economic recovery.

Bloomberg polled analysts, and the majority of them predict the one-year LPR, which supports mortgage lending, to be reduced by 15 basis points, the greatest margin since January 2022. A comparable reduction in the five-year rate would be the largest in a year.LPR rates are at 3.55 and 4.2%, respectively.

Economists questioned were united in their expectation of a reduction in the LPR, which normally follows a reduction in the medium-term loan facility. Following last week’s decrease, the MLF rate, which oversees banking sector liquidity, is currently 2.5 percent, the lowest since it was introduced in 2014.

Despite months of poor economic statistics, with consumer prices falling into deflationary zone in July and growth of only 0.8% over the preceding three months, Beijing has refrained from launching massive intervention.

However, this month’s missed bond payments from real estate developer Country Garden and savings products tied to investment firm Zhongzhi have raised concerns among onlookers.

“We believe the risk of systemic concerns emerging in China remains low,” Goldman Sachs analysts wrote on Saturday, adding that “spread[s] will likely remain volatile until macro volatility subsides,” which “may require a more concerted easing effort by China policymakers.”

China’s securities regulator unveiled a range of reforms aimed at increasing investment in its capital markets on Friday evening, including encouraging share buybacks to stabilize prices and lowering transaction costs for brokers.

The LPR is influenced in part by China’s largest banks, which are due to deliver second-quarter financial reports this month. The one-year LPR, which was lowered by 10 basis points in June, is closely observed because to its relationship to mortgage borrowing costs.


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