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PBOC lowers the loan’s prime rates (LPR) for 1 year, 5 years

Pedestrians walk past the People's Bank of China's headquarters in Beijing, China.

Giulia Marchi | Bloomberg | Getty Images

China's central bank lowered its benchmark lending rates again on Thursday amid concerns about an economic downturn in the world's second-largest economy.

The People's Bank of China reduced the annual prime interest rate by 10 basis points from 3.8% to 3.7%. In December, PBOC lowered the one-year prime interest rate on loans for the first time since April 2020.

The five-year prime interest rate on loans was lowered by 5 basis points from 4.65% to 4.6% - it was the first reduction since April 2020, at the height of the coronavirus pandemic in the country.

Lending rates affect lending rates for business and household loans in the country.

Most new and outstanding loans in China are based on the one-year LPR, but the five-year interest rate affects the pricing of home loans, according to Reuters. A snap poll from Reuters had shown that most participants expected China to lower both lending rates on Thursday.

The interest rate cuts continue PBOC's efforts to push down borrowing costs, according to Capital Economics.

"Real loans will now be a little cheaper, which should help increase housing demand. PBOC has already pushed banks to increase the amount of mortgages," Sheana Yue, China economist at the firm, said in a note after the announcement.

"Targeted support for property buyers seems to limit one of the more serious downside risks facing the economy," Yue added.

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Although China was the first major economy to shake off most of its pandemic-driven economic shock, concerns grew last year about the sustainability of growth. They came as a result of subdued consumer spending, tighter rules, a struggling real estate sector as well as Beijing's zero-tolerance Covid policy.

On Monday, the central bank defied market expectations and lowered borrowing costs for medium-term loans for the first time since April 2020.

The PBOC said it lowered the interest rate of 700 billion yuan ($ 110.33 billion) on one-year medium-term loan facility loans by 10 basis points from 2.95% to 2.85%.

Bruce Pang of China Renaissance noted that the central bank's cuts at various rates would help both the declining real estate market and struggling small businesses.

The varying cuts send a pretty strong signal of political direction, he said. They reflect how the central bank responds more quickly with efforts to lower financing costs, ease the pressure on the real estate market and encourage consumption and investment.

The Chinese economy grew by 8.1% in 2021 as steadily growing industrial production offset a decline in retail sales. Nevertheless, that figure fell below economists' expectations of growth of 8.4%.

- CNBC's Weizhen Tan and Evelyn Cheng contributed to the report.

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