China’s bold mortgage rate cut met with lukewarm reaction

China ramped up support for the troubled property sector with its biggest-ever cut to a key mortgage reference rate. But it was met with a muted response from investors, raising expectations that more aggressive measures to support the economy will be needed in the months to come.

Chinese lenders slashed their five-year loan prime rate by 25 basis points to 3.95%, the People’s Bank of China announced Tuesday. It was the first cut since June and the largest reduction since a revamp of the rate was rolled out in 2019.

Still, the move failed to impress investors. China’s benchmark CSI 300 Index ended 0.2% higher in what was largely a listless session. The yuan was little changed after support from state banks earlier in the day and yields on China’s government bonds - which have been falling on greater bets for easing - slipped 2 basis points to 2.42%. China developer stocks initially jumped, but quickly tapered the move to trade only modestly higher.

“A bigger cut may boost housing sentiment in the near-term, though this unlikely marks a turnaround in the property sector,” said Alex Loo, macro strategist at TD Securities in Singapore.

Lowering the loan rate will allow more cities in China to reduce minimum mortgage rates for homebuyers, which can stimulate sluggish demand for apartments as prices fall. The move shows an intensifying focus on measures to combat the property crisis, which has been a major drag on the world’s second-largest economy and threatens its path toward sustainable growth.

Loo cited the nation’s “urgency” to entice more homebuyers as property sales in key cities slumped during the week-long Lunar New Year holiday. Next month is traditionally a peak season for home sales, making any efforts to spur more purchases all the more timely.

“It is...