The People’s Bank of China (PBOC) has decided to keep its benchmark lending rates unchanged, a move that aligns with economists’ expectations. Beijing’s surprise move on Friday came in response to some very worrying signs of economic fatigue. Beginning in August, export growth began to decelerate to a mere 4.4%. Future mood swings The PBOC determines these rates each month, taking bids from commercial banks. These proposals typically run counter to the rates these banks charge their most creditworthy customers.
In May, the People’s Bank of China lowered its key lending rates by 10 basis points. Since then, it has made the unfortunate decision to pause any further increases, despite the continued economic headwinds. The one-year Loan Prime Rate (LPR) is a key reference rate that applies to the vast majority of new and outstanding loans. Yet it stays at a critical juncture for borrowers. A stable five-year LPR is critical to establishing mortgage pricing, which would undermine the housing market’s stability if not constant.
Chinese policymakers seem to be preparing for marginal monetary easing before the end of the year. They hope to stimulate the country’s economy and keep it afloat. The current target is 5 percent annual growth. This goal promises a continued economic momentum, something particularly critical amid global uncertainties where the rest of the world is looking to China for stability.
The PBOC’s decision to maintain the status quo comes in light of several economic indicators that suggest a softening in China’s economic performance. Exports have been hit especially hard by the lingering effects of frontloading shipments and the effects of robust U.S. trade policies aimed at transshipment routes. Together, these trends have produced a perfect storm for China’s economy, now the second-largest in the world.
The PBOC does not want to drastically change the economic landscape but rather ensure some stability in its monetary policy. If by keeping rates constant, it provides the kind of prudence we need both domestically and with outside pressures. Of course, these events are still unfolding, and the central bank is closely assessing the new financial environment. These assessments will play a huge role in shaping economic recovery plans.