China cut benchmark lending rates for the first time since October on Tuesday, while major state banks lowered deposit rates as authorities work to ease monetary policy to help buffer the economy from the impact of the Sino-US trade war.

The widely expected rate cuts are aimed at stimulating consumption and loan growth as the world's No. 2 economy softens, while still protecting commercial lenders' shrinking profit margins.

The People's Bank of China said the one-year loan prime rate (LPR), a benchmark determined by banks, had been lowered by 10 basis points to 3.0%, while the five-year LPR was reduced by the same margin to 3.5%.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

The lending rate cut was announced just after five of China's biggest state-owned banks said they have trimmed their deposit interest rates.

Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and Bank of China reduced deposit rates by 5-25 basis points (bps) for some tenors, according to rates shown on the banks' mobile apps. Reuters had reported on Monday that the banks planned to cut their deposit rates from Tuesday.

The deposit rate reductions should guide smaller lenders in making similar cuts.

Banking shares edged higher following the rate decision, with the CSI Bank Index rising 0.7%, outperforming the benchmark Shanghai Composite index.

Marco Sun, chief financial market analyst at MUFG Bank (China), said the dual rate cuts were aimed at boosting credit lending and stimulating consumption.

"The central bank is likely to switch to a wait-and-see approach in coming months unless external geopolitical risks deteriorate enough to extinguish hopes that the economy can stabilise," Sun said.

Tuesday's rate cuts were a pre-emptive move, said Xing Zhaopeng, senior China strategist at ANZ.

"One purpose is to repair commercial banks' net interest margin and get prepared for the future," Xing said, expecting one more rate cut by the end of July.

The rate cuts are part of a package of measures announced by PBOC Governor Pan Gongsheng and other financial regulators before talks between China and the US in Geneva earlier this month that led to a de-escalation in their trade war.

Global investment banks are raising their forecasts for China's economic growth this year, after Beijing and Washington agreed to a 90-day pause on tariffs, despite uncertainty around Sino-US trade negotiations.

"We still believe it will be quite challenging for Beijing to achieve its 'around 5%' growth target unless it rolls out a sizable stimulus package," Ting Lu, chief China economist at Nomura, said in a note this week. "Considering the respite on the trade war, Beijing might be under less pressure to introduce the necessary stimulus and reforms."

Recent economic readings show growth remains patchy and lacklustre.

China's new home prices were unchanged in April from a month earlier, official data showed on Monday, extending the no-growth trend to nearly two years despite policymakers' efforts to stabilise the sector. Meanwhile, new bank loans also tumbled more than expected last month.

Disinflation gives RBA room to ease

Meanwihle, Australia’s central bank reduced its benchmark interest rate by a quarter percentage for a second time this year, to 3.85% after inflation fell within a target range.

The Reserve Bank of Australia reduced its cash rate from 4.1%. The reduction from 4.35% at its February board meeting was Australia’s first rate cut since October 2020.

The rate cut was anticipated, although expectations had declined slightly after the United States and China agreed last week to cut back recent tariff hikes for 90 days, reviving stalled trade between the world two biggest economies.

The bank adjusts interest rates to steer inflation toward a target band of between 2% and 3%.

During the March quarter, annual inflation was 2.4%. The trimmed mean — a gauge of underlying inflation which is the bank’s preferred measure — was 2.9%.

Inflation was also steady at 2.4% in the previous three months. But the underlying figure, which strips out the smallest and largest values, was 3.2% in the last quarter of 2024.

Inflation has gradually declined after it peaked at 7.8% in the last quarter of 2022.

Unemployment inched up to 4.1% in January-March from 4.0% in the December quarter but remains relatively low. Economists fear a shortage of workers could fuel further inflation.