China’s Central Bank Keeps Loan Prime Rates Unchanged

China’s central bank retained its interest rate for new corporate loan on Monday despite economic growth easing to the lowest level in nearly three decades.

The People’s Bank of China left the one-year loan prime rate unchanged at 4.20 percent. The five-year lending rate was also maintained at 4.85 percent.

The loan prime rate is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This new lending rate replaced PBoC’s traditional benchmark lending rate in August.

Markets were expecting a rate cut this month as the economy grew only 6 percent in the third quarter, the weakest since 1992. The prolonged trade disputes with the United States weighed heavily on foreign demand and investment.

The International Monetary Fund forecast China’s growth to slow to 6.1 percent this year and to 5.8 percent next year.

Today’s central bank decision will only increase pressure on the PBoC to ease funding costs for banks in the coming months, Julian Evans-Pritchard and Martin Lynge Rasmussen, economists at Capital Economics, said.

As rate cuts to the LPR only feed through to interest rates on new loans, not outstanding ones, the additional monetary easing that would possibly materialize before long will probably not limit itself to targeting the LPR, the economists noted.

Economists said the PBoC probably won’t be able to engineer large LPR cuts without a further reduction in interbank rates in any case.

Iris Pang, an ING economist, said the question now is whether China believes it is unnecessary to reduce interest rates given better than expected September data, or whether it wants to keep the interest rate cut ‘bullet’ for the future in case trade tensions escalate further.

The material has been provided by InstaForex Company – www.instaforex.com