What China's rate adjustment means: Key things to know

The one-year LPR was lowered by 10 basis points to 3.45% from 3.55%, a smaller cut than what most economists surveyed by Bloomberg had expected.

Chinese banks kept a key interest rate that guides mortgages on hold, a surprise move that sowed confusion over the world's second-biggest economy's approach to stemming a property slump.

China's central bank trimmed its one-year lending rate by 10 basis points and left its five-year rate unmoved, which surprised analysts who had expected cuts of 15 basis points to both. One basis point is one-hundredth of a percentage point.

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Important things to know:

1 The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.45 percent from 3.55 percent, a smaller cut than what most economists surveyed by Bloomberg had expected.

2 The five-year loan prime rate was unexpectedly held steady at 4.2 percent on August 21, according to data from the People’s Bank of China (PBoC).

3 Most economists had predicted the rate to be cut by 15 basis points following a similar reduction last week to an important central bank policy loan rate. That was seen as a precursor for a cut to the 5-year LPR.

4 Investors have been hoping for a repeat of the massive fiscal spending that has juiced the economy in the past but Beijing seems reluctant to add to its borrowing tasks.

5 The government has signalled more urgency in shoring up growth as borrowing demand slumps, deflation pressures take hold and confidence struggles to recover. Days after last week’s shock cut to the PBOC’s medium-term lending facility rate, the central bank and financial regulators met with bank executives and told lenders again to boost loans.

6 Weak data recently prompted several banks to cut their growth forecasts for the year to below 5 percent, implying that the government may miss a growth target set earlier this year. Investors are also concerned about contagion risks following a liquidity crisis at a major shadow bank.

7 Lenders may have also been constrained because average new mortgage rates are at record lows. The average fell to 4.11 percent in June, according to last week’s PBOC report.

(With inputs from agencies)