China’s benchmark lending rates remained unchanged, reflecting market expectations after the central bank held its policy rates steady earlier this month. On Thursday, the People’s Bank of China (PBOC) announced that the one-year loan prime rate (LPR) would remain at 3.45%, and the five-year rate would stay at 3.95%. These rates have been consistent since February, signaling a cautious approach amid global economic uncertainty and domestic challenges.
The decision to maintain the rates was widely anticipated following the PBOC’s move to keep the medium-term lending facility (MLF) rate steady. Banks in China are required to price their LPR based on the MLF, which directly impacts borrowing costs and overall economic activity. By holding these rates steady, the central bank aims to support economic growth while mitigating financial risks, particularly in key sectors such as real estate and manufacturing.
PBOC Governor Pan Gongsheng, speaking at a financial forum, suggested a potential shift in the central bank’s monetary policy tools. He indicated that short-term rates, like the seven-day reverse repurchase agreement rate, might guide markets as the new policy rate. This move could align China’s monetary policy framework more closely with international practices, enhancing its effectiveness and flexibility. Pan emphasized that the PBOC is exploring ways to modernize its policy framework to better address current economic conditions. China’s Benchmark Lending Rates.
The proposal to adopt a short-term policy rate comes as China faces a prolonged property slump and weak borrowing demand. Recent data revealed that Chinese banks issued fewer loans than expected in May, indicating persistent credit demand weakness. While a policy rate cut might offer limited benefits, maintaining stable rates helps prevent further financial instability. Economists suggest the PBOC’s cautious stance reflects concerns about capital outflows and maintaining investor confidence in the yuan.
Looking forward, economists expect Beijing to gradually ease its monetary policy in the second half of the year to support the economy. This could involve trimming policy rates and reducing banks’ reserve requirements. However, any major shifts are likely to be gradual and carefully calibrated, aiming to balance growth and financial stability amid ongoing global and domestic uncertainties.
