The one-year LPR dipped to 4.20% at its monthly fixing on Friday, 5 bps lower than 4.25% in August. However, the five-year LPR was unchanged at 4.85%.

Friday's was the second reduction in the one-year LPR, a lending reference rate set by 18 banks that the PBOC revamped last month. It is loosely pegged it to the rate on the central bank's medium-term lending facility (MLF). The MLF rate at 3.3% was last cut in early 2016.

China's economic growth has cooled to near 30-year lows and activity worsened markedly in July and August. But its central bank has been cautious about deploying more aggressive stimulus due to high debt levels and concerns it could fuel property bubbles.

Here are analysts' comments on the rate cut:

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE:

"While the latest LPR reduction should nudge banks to reduce lending rates slightly, the impact on economic activity will be marginal.

"Since the new LPR is relatively untested, the PBOC appears to be taking a measured approach at first. However, with economic activity likely to come under further pressure in the coming quarters and monetary easing so far failing to generate much of a pick-up in credit growth, we think the PBOC will need to start engineering larger declines in the LPR before long."

LUO YUNFENG, ANALYST AT MERCHANTS SECURITIES, BEIJING:

"The LPR is based on banks’ quotations. If there is no government intervention, it’s hard to believe banks are willing to lower their quotations, because corporate demand for loans is not weak at all. Household loans are restricted by policies.

"Why should banks lower the rate if demand remains strong? After the RRR cut, market rates have not fallen much compared with August.

"It’s believed that the government wants banks to give up some profits, if that’s the case, it’s natural for the LPR to be lowered, probably due to the official guidance.

"Consumer inflation may pick up further in November and December, it’s hard to believe there is much room for monetary policy loosening. The government has not loosened its property controls, I think they worry more about property prices than consumer prices.”

LINAN LIU, GREATER CHINA MACRO STRATEGIST AT DEUTSCHE BANK, HONG KONG:

"I think the direction (of LPR) is more important than the small cut. The overall direction of monetary policy is towards easing."

Liu is calling for 10-15 bps cut in 1-year LPR this year.

"The 5 year (tenor) was recently introduced and more relevant for the mortgage market. The 1-year has a more direct impact on assisting with financing of small and medium sized firms"

"China bonds have been underperforming in the global bond rally and outperforming in the recent sell-off. Absolute yields versus the U.S. yield curve, the cheapening of the exchange rate, and RMB index inclusion are positive factors.

"I don't think investors should position for a big rally in the short term unless there are negative surprises from the US-China trade talks or from economic fundamentals. It's not that kind of market. It is a market that attracts medium to long term investment."

WEN BIN, ECONOMIST, MINSHENG BANK, BEIJING:

“The size of the cut in 1-year LPR is limited. No cut in five-year LPR reflects the need to keep mortgage rates steady.

"I think they will definitely lower LPR further and they could cut the MLF rate. Some MLF loans will mature on Oct. 5. We also need to watch if the PBOC will cut the rate on TMLF (targeted medium-term lending facility).

"The Federal Reserve has cut interest rates twice, each by 25 basis points. So it would be appropriate if we cut rates by 25 bps. That will help stabilise market expectations, investment, consumption and will not put pressure on the exchange rate."

WANG SHENSHEN, ECONOMIST, TOKAI TOKYO RESEARCH CENTER:

"The move follows the 25 basis point rate cut by the U.S. Federal Reserve.

"The direct, and immediate impact on the economy will be limited given the small size of the cut but the cut has made it clear the Chinese authorities are taking an accommodative stance and should give reassurance to Chinese stock markets."

IRIS PANG, GREATER CHINA ECONOMIST, ING, HONG KONG:

"I believe that the decision comes from the fact that the August data, especially industrial production and fixed-asset investments, were very weak. The cut will guide interest rates lower in bank loans and other financial assets, especially the local government special bonds that are used to fund infrastructure projects.

"Infrastructure projects will face a lower interest cost. I think this is necessary, for now, as the trade war continues.

"I think it is not a growth-stimulation story, I think it is more a protection story, to not fall into a weaker growth range. Growth has been very weak and this is more for lowering interest costs for production and infrastructure."

KIYOSHI ISHIGANE, CHIEF FUND MANAGER, AT MITSUBISHI UFJ KOKUSAI ASSET MANAGEMENT, TOKYO:

"The PBOC is experimenting with this new system. They are lowering rates very gradually and trying to measure the impact and see where the money flows as a result.

"Normally, a central bank would move in 25 basis point increments, but the PBOC is taking a very gradual approach because it wants to see how this will impact the financial system.

"The problem is even if the PBOC lowers rates, the money does not go to small- and medium-sized enterprises. For many banks, this lending is risky."

KEN CHEUNG, CHIEF ASIAN FX STRATEGIST AT MIZUHO, HONG KONG:

"The PBoC’s easing package was somewhat disappointing to doves. The previously broad-based RRR cuts fueled expectation for PBoC’s bolder rate cut but it refrained from delivering a large easing package.

"Indeed, the status quo of Medium Lending Facility (MLF) yields and reverse repo yields earlier this week had pointed to limited magnitude for LPR cut.

"Without PBOC’s offer to lower funding costs, Chinese banks are reluctant to cut their LPR, which could squeeze interest rate margin and hurt their profitability. The status quo of 5Y LPR also reflected PBoC’s policy to curb the property prices rally as the longer tenor LPR links to the mortgage rate."

ROBIN XING, CHIEF CHINA ECONOMIST AT MORGAN STANLEY IN HONG KONG:

“This suggests that policy easing has remained incremental and defensive in nature, and that policymakers are still concerned about property price inflation.

“While we continue to expect 0.75-1.0ppt of GDP local government bond front-loading and modest LPR cuts in the coming quarter (via window guidance or MLF cuts), it may not fully offset growth drags amid ongoing trade uncertainty and property tightening.

“We thus maintain our view that China's economic growth could continue to soften.”

(Reporting by Hideyuki Sano, Stanley White, Noah Sin, Kevin Yao and Tom Westbrook; Editing by Richard Borsuk & Kim Coghill)