Chinese banks maintained their benchmark lending rates for September, as policymakers hold off on further monetary stimulus while financial institutions struggle with record-low profit margins.
The one-year loan prime rate will stay at 3.35% and the five-year rate, a reference for long-term credit including mortgages, remains at 3.85%, according to a statement from the People’s Bank of China on Friday. The moves were in line with the forecasts of most economists surveyed by Bloomberg.
The inaction follows the PBOC’s decision to leave the seven-day reverse repurchase rate unchanged in its daily open market operations since a July cut. Chinese banks are also reluctant to reduce lending rates because their net interest margin has dropped to a historic low of 1.54% as of the end of June.
That said, expectations have started to build that easing is imminent after the Chinese central bank indicated last week it was preparing additional policies to revive the economy.
What Bloomberg Economics Says...
“A reduction at Friday’s fixing never looked likely — officials wouldn’t want to give the impression they’re taking cues from the Federal Reserve. They may also have wanted to give July’s cut more time to sink in.”— Eric Zhu, economist
See also: Trump's tariffs hurt more than just China
The US Federal Reserve’s bold start to cutting rates on Wednesday also means a narrower policy differential between the US and China, reducing downward pressure on the yuan.
“We still look for more monetary policy easing in the near term, given ongoing downwards economic momentum which almost put this year’s 5% GDP target out of reach,” said Becky Liu, head of China macro strategy at Standard Chartered Plc.
Bloomberg Economics expects the PBOC to trim its policy rates by at least 10 basis points in the fourth quarter, offering banks more room to lower their LPRs.
See also: Buying into China stimulus Is ‘painful trade’, Lombard Odier says
“The Fed cut has opened the door for more easing measures for China,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “One reason for delay is that the cut may be included in a bigger package, which is still under review by the top leadership.”
The world’s second-largest economy is in urgent need of more stimulus to achieve the government’s annual goal of around 5% growth this year.
Recent official data showed production, consumption and investment all cooled more than economists had expected in August and credit demand remained sluggish, reflecting weak confidence across China in the face of a property slump and threats of deflation.
The PBOC is trying to guide market rates with its short-term tool after years of using the medium-term lending facility for that purpose. Lenders cut the LPRs in July soon after policymakers lowered the seven-day rate.
On Wednesday, the central bank delayed until later this month the renewal of some maturing funds it offered domestic lenders via the one-year MLF as part of the overhaul of its policy toolkit. The PBOC last trimmed the MLF rate on July 25, when it was decreased by the most since 2020.
