SHANGHAI/SINGAPORE (Reuters) – China has opted to keep its benchmark lending rates unchanged at the monthly fixing, aligning with market expectations. This decision comes as a set of economic data suggests that the country’s economy is showing signs of stabilizing, and the pressure of a weaker yuan has restrained further monetary easing.
The one-year loan prime rate (LPR) remains at 3.45%, with the five-year LPR staying at 4.20%.
The third-quarter Gross Domestic Product (GDP) and retail sales data have surpassed expectations, indicating that China’s economic recovery is gaining traction, requiring less monetary support.
Emerging market analysts at TD Securities noted in a research note that, “Economic activity has stabilized, and authorities can afford to wait before implementing further monetary easing.”
Additionally, concerns regarding the yuan’s depreciation were a significant factor in the decision against further rate cuts. The yuan has weakened by over 5% against the dollar this year, and increasing liquidity could intensify this pressure on the currency.
The one-year LPR largely influences the pricing of most loans in China, while the five-year rate plays a key role in determining the pricing of longer-term loans, particularly mortgages.
The People’s Bank of China (PBOC) decision to maintain stable LPR rates comes after rolling over maturing medium-term policy loans while leaving their interest rates unchanged. The medium-term lending facility (MLF) rate, considered a precursor to changes in lending benchmarks, stayed consistent. The PBOC also provided significant liquidity support, allowing banks to extend credit when funding conditions were tight due to considerable bond supplies and government tax collections.
Though rates have remained unchanged for now, market participants are not dismissing the possibility of rate cuts in the coming months. Barclays economists anticipate fresh 10-basis-point cuts to policy rates in the fourth quarter and the first quarter of the next year. This expectation is due to lingering deflation risks and weak domestic demand conditions.
In August, China reduced the one-year benchmark lending rate, but unexpectedly, it kept the five-year rate unchanged. Throughout this year, one-year and five-year LPRs have been lowered by 20 basis points and 10 basis points, respectively.
It is noteworthy that the LPRs, usually applied to banks’ top clients, are determined by 18 designated commercial banks that submit proposed rates to the central bank every month.
(Reporting by Li Gu and Tom Westbrook; Editing by Edmund Klamann and Jacqueline Wong)