The People’s Bank of China (PBC) announced in its monthly update that the one-year loan prime rate (LPR) will remain at its current level for at least another month.
Established in 2019 as a benchmark for interest rates in the country, the LPR is used to set the cost of new loans, particularly for businesses, as well as existing variable-rate loans.
The rate is determined based on proposals from a group of commercial banks, including smaller institutions with greater exposure to bad loans, aiming to reduce financing costs and support the “real economy.”
The PBC also stated that the five-year LPR or longer—a reference for mortgage loans—will remain at 3.5%, aligning with analysts’ expectations.
The last change in China’s rates occurred in May when the central bank lowered both LPRs by 10 basis points: from 3.1% to 3% for the one-year rate, and from 3.6% to 3.5% for the five-year rate.
At that time, analysts considered the decision “obvious,” given the challenging context faced by the world’s second-largest economy, leading to forecasts of further cuts throughout the year.
The recent decision by the US Federal Reserve to lower rates sparked speculation that the PBC might follow suit, taking the opportunity to ease monetary policy without exerting new downward pressure on the yuan.
However, sources close to the central bank indicated concerns about fueling a market bubble or exacerbating issues of industrial overcapacity.
Analysts note internal and external weak demand, deflation risks, insufficient stimuli, the prolonged real estate sector crisis, lack of consumer and private sector confidence, and the uncertainty caused by the trade war with the United States, as factors continuing to affect China’s economic recovery following years of the ‘zero covid’ policy.
