The PBOC did not waver in its decision to keep its lending rates unchanged. This decision comes despite a string of recent economic data that have all beaten expectations. In response, the central bank will go to great lengths to stabilize the yuan. This decision is a reaction to years of external pressures, largely driven by trade wars. The 1-year Loan Prime Rate (LPR) is held at 3.10%. At the same time, the 5-year LPR, which serves as the benchmark for most mortgage rates, has held flat at 3.6%.
The benchmark 7-day repo rate closely guiding the LPRs is currently at 1.5%. In September, the rate fell by 20 basis points. This was counted as an economic stimulus measure intended to increase liquidity in the financial system.
Despite the PBOC’s maintenance of the LPRs, analysts are observing the implications of external factors on China’s economy. Lynn Song and Min Joo Kang, analysts at ING, highlighted that “low inflation and strong external headwinds amid escalating tariff threats provide a strong case for easing.” This very short statement is a profound recognition about the trade labyrinth that underscores the fence of China’s dynamic and complex economic environment.
The PBOC has kept the LPRs steady since October of last year, demonstrating a commitment to stability during uncertain times. Despite widespread speculation, the central bank ultimately chose not to cut rates at that meeting. This decision comes in the wake of stronger-than-expected economic performance indicators, suggesting that growth is on the upswing, but risks linger.
The 1-year LPR, which has remained frozen since its last upward adjustment, exerts major influence over corporate loans in China. And most of the loans that households take out are similarly pegged to this rate. The 5-year LPR maintains its relevance as a key reference point for mortgage loans, reflecting the broader dynamics of the property market in China.
Overall, the PBOC’s decision to maintain these lending rates signals its approach to balancing economic growth with potential risks arising from global trade tensions and domestic challenges. Going forward, it will be central bank market participants and economists who will be watching to see how closely the central bank follows its own playbook.