The Day at a Glance | May 20 2022

The Top

*China cut its long term interest rate more than expected (5 year prime lending rate; from 4.6% to 4.45%).

*Russia will cut its supply of gas to Finland after it denied to pay in rubles.

*July could be the right moment to start the increasing rates cycle: Ignacio Visco, member of the ECB.

*US Congress approves 40 billion dollar package for Ukraine; G-7 would approve 19 billion in additional financial aid.

*Consumer confidence in the UK dropped to its lowest level since the 1970`s.

*Canada to ban China`s Huawei and ZTE from its 5G networks.

Economic environment

Stimulus in China. The People`s Bank of China decided to reduce the 5 year prime lending rate by cutting it in 15 bp to 4.45%. This decision could help reduce the cost of mortgages and incentivize demand for credit in the real-estate sector, which is in crisis due to the fall in prices and a decrease in property sales – in addition to COVID-19 confinement measures. This is the largest decrease in these rates since 2019 and exceeded estimates of a 10bp cut. The new rate will be applied to new mortgages immediately, while existing mortgages will have to wait a year to take advantage of the rate. Meanwhile, the preferential loan rate remained at 3.7%, even though it was also expected to drop between 5 and 10bp. The fact that the central bank left this rate unchanged confirms that monetary authorities will maintain a focused stimulus strategy, rather than take a general approach. Markets reacted positively to this news, but more is still necessary to reactivate demand in the real-estate sector, which is still in a deep contraction: Growth of credit in the sector dropped to its lowest level in almost 5 years in April, with long and medium term home loans recording a 31 billion Yuan decrease during the month. More than asking for new loans, Chinese families are paying existing loans and demand for houses remains at a halt due to COVID-19 outbreaks, new regulations in the sector and poor liquidity conditions. The cuts in rates could help see a rebound in mortgage credit but are still far from reviving the sector as a growth driver. According to Bloomberg, China has injected up to 5.3 trillion dollars in fiscal and monetary stimulus this year, even below the levels seen in 2020.

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