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European equities followed Asian stocks lower on Tuesday as investors questioned whether China’s smaller than expected cut to its benchmark lending rate would be sufficient to boost the country’s sluggish economy.

Europe’s region-wide Stoxx 600 lost 0.1 per cent, extending its losses from the previous session, while Germany’s Dax was down 0.3 per cent. London’s FTSE 100 bucked the regional trend, rising 0.2 per cent.

The moves came after the People’s Bank of China reduced its one-year loan prime rate by 0.1 percentage point to 3.55 per cent in an effort to bolster growth in the world’s second-largest economy following three years of severe Covid-19 restrictions.

China’s benchmark CSI 300 stock index fell 0.2 per cent after the announcement, dragged down by losses in property stocks. The Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 1.8 per cent. In Europe, the Stoxx 600 basic resources index fell 0.5 per cent.

Policymakers also lowered the country’s mortgage-linked five-year loan prime rate to 4.2 per cent from 4.3 per cent, undershooting investors’ expectations of a 0.15 percentage point cut.

“The risk with this incremental rate-reduction approach is that potential homebuyers will expect further mortgage reductions and therefore hold off purchases, depressing home sales activity,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

Goldman Sachs over the weekend lowered its estimate for China’s gross domestic product growth in 2023 to 5.4 per cent from 6 per cent, noting that a weak property market and low investor confidence continued to stall economic recovery.

Meanwhile, traders prepared for the release of UK economic data and a monetary policy decision from the Bank of England later in the week. Markets expect the central bank to lift rates to a 15-year high of 4.75 per cent when policymakers meet on Thursday.

The annual rate of consumer price inflation is forecast to have edged down to 8.4 per cent in May, from 8.7 per cent in April, remaining above that of Europe and the US and far exceeding the BoE’s 2 per cent target.

Yields on two-year gilts, which are sensitive to interest rate changes, slipped 0.02 percentage points to 5.06 per cent, having hit their highest level since 2008 in the previous session. Yields on the benchmark 10-year note were 0.03 per cent lower at 4.45 per cent. Bond yields rise as prices fall.

In the US, contracts tracking the benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.2 per cent, as Wall Street was set to reopen after a federal holiday on Monday.

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