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China’s central bank cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks.

In a stark policy divergence with other major economies, the People’s Bank of China lowered the rate at which it provides one-year loans to banks by 10 basis points — the first reduction since April 2020.

While inflation is the dominant concern for central bankers in the U.S. and Europe, China’s relatively stable prices mean policy makers have shifted to boosting growth. Official data Monday showed gross domestic product rose 4% last quarter from a year earlier, the weakest since early 2020.

Read More: China Becomes First Central Bank to Cut Rates in 2022: Map

The rate cut is part of Beijing’s efforts to put a floor under growth in a crucial year of leadership transition for the world’s second-largest economy. The biggest challenges to meeting that goal are sporadic outbreaks of the more-infectious omicron coronavirus variant, and continued falls in property sales reducing housing investment.

Housing sales remained low in December, while consumer spending slowed sharply as the government tightened virus controls. An outbreak of omicron-variant virus cases in January, including in Beijing over the weekend, will further curb sentiment.

“Consumption remains the weakest link in China’s growth story at the moment and that will by and large continue for much of this year,” said Louis Kuijs, head of Asia economics at Oxford Economics. “We think Beijing has a bottom line of around 5%. As is the case at the moment, if growth is weaker than that, they’d feel strongly motivated to pursue more policy easing.”

Story continues

Economists expect more policy action from the PBOC in coming months. Goldman Sachs Group Inc. said there’s a possibility the central bank will allow banks to lower the five-year loan prime rate, a reference for mortgages, on Thursday. The one-year rate was already cut in December. Economists at Australia & New Zealand Banking Group and BNP Paribas see the likelihood of further reductions in the reserve requirement ratio for banks.

Read More: PBOC Seen Cutting Rates Further, Lowering RRR to Boost Economy

For the full year, China’s economy expanded 8.1%, well above the government’s target of “over 6%,” due in part to the low base of growth in 2020. Last year Beijing took advantage of that as well as strong overseas demand, to try and remake its economy: reining in large technology platform companies and trying to squeeze financing to real-estate companies to reduce the economy’s reliance on property development, which accounts for as much as 20% of GDP.

The financing squeeze led to a 11.4% fall in the area of new projects started by real-estate developers last year, dragging down production of commodities like steel and cement. Property investment dropped 14% in December from a year earlier, according to Bloomberg calculations based on full-year government figures.

“The property sector’s drag on fixed asset investment is quite stark and shocking,” said Liu Peiqian, China economist at NatWest Group Plc.

Consumption returned to growth after a historic decline in 2020, and accounted for the bulk of last year’s economic expansion, although the pace of consumer spending growth was below pre-pandemic levels. The record trade surplus of $676 billion last year accounted for about one fifth of full-year growth.

Along with the rate cut, the PBOC also injected more liquidity by offering 700 billion yuan ($110 billion) of one-year loans, exceeding the 500 billion yuan maturing, and added 100 billion yuan with seven-day reverse repos, more than the 10 billion due. The bank also lowered its seven-day reverse repurchase rate to 2.1% from 2.2%.

What Bloomberg Economics Says…

The People’s Bank of China’s bigger-than-expected cut to the one-year medium-term lending facility rate shows it’s serious about putting a prop under the economy. The move suggests banks will quote a lower one-year Loan Prime Rate at Thursday’s fixing for a second month in a row — providing more support for a slowing economy.

Chang Shu and David Qu

For the full report, click here

Chinese stocks rose following the rate cuts, with the benchmark CSI 300 Index up as much as 1% after falling in the previous two days. The yield on 10-year sovereign bonds trimmed its drop to 1 basis point to 2.78% as of 2:10 p.m. local time, after falling 3 basis points in response to the rate reductions.

The interest rate cuts were the latest in a string of growth-supporting moves by Beijing. Policy makers have stepped up the issuance of bonds used by local governments to fund infrastructure, and told banks to accelerate lending to property companies to reduce the risk of a hard landing for the housing market.

Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong, forecasts the PBOC will cut the reserve requirement ratio for banks by 100 basis points this year, but sees no more rate cuts unless economic growth significantly lags expectations.

“The interest rate cut has laid a good foundation ahead of the Lunar New Year to stabilize expectations, but going forward it will require the combination of fiscal, industrial and employment policies to boost growth,” he said.

(Updates with expectations of further policy action.)

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