Posted on February 20, 2025, by Niftynews
The People Bank of China (PBOC) decided to keep its key lending rates unchanged, signaling a shift towards prioritizing financial stability over aggressive rate cuts to boost the country’s economy. The 1-year loan prime rate (LPR) remains at 3.1%, and the 5-year LPR is steady at 3.6%. These rates are vital for influencing corporate loans and mortgage rates, with the decision reflecting a cautious approach from Beijing as it faces mounting challenges.
People Bank of China Key Rates and Economic Impact
The People Bank of China decision to hold the LPR steady aligns with the consensus in a Reuters poll. The LPRs are determined monthly based on rates proposed by commercial banks to the PBOC. The 1-year LPR primarily impacts corporate loans and most household loans, while the 5-year rate serves as a benchmark for mortgage rates.
According to Bruce Pang, adjunct associate professor at the Chinese University of Hong Kong, the stabilization of China policy rate is due to several factors, including pressure on banks’ net interest margins and the exchange rate. This follows a slower pace of rate cuts by the Federal Reserve, adding complexity to the People Bank of China rate management.
Trade Tensions and the Yuan’s Pressure
One of the major influences on China monetary policy has been the ongoing trade tensions with the United States. Since the U.S. imposed a 10% tariff on all Chinese imports, the People’s Bank of China has been under pressure to defend the yuan. A weaker yuan can benefit Chinese exports by keeping them competitively priced on the global market. However, this comes at the expense of making imports more expensive at a time when consumer demand within China is weak.
The yuan has depreciated 2.5% against the U.S. dollar since the election of President Donald Trump, adding pressure on the People Bank of China. At the same time, the PBOC has been cautious with rate cuts, aiming to avoid undermining the stability of the currency while also trying to stimulate the faltering domestic economy.
The Future of Interest Rate Cuts
While there have been discussions of cutting the 7-day reverse repo rate to help stimulate economic activity, the People Bank of China has so far maintained the 1.5% rate since last September. This rate, along with others, is part of a broader stimulus package that China implemented to boost growth. However, the PBOC remains cautious, as the goal is to balance promoting growth with maintaining stability in the financial markets and the currency.
Lynn Song, chief economist at ING, stated that there is still a possibility of further rate cuts in the first quarter of 2025, given the relatively high real interest rates. A further reduction could help encourage investment and consumption, which have been slower to recover.
PBOC Long-Term Strategy
PBOC Governor Pan Gongsheng emphasized the importance of a stable yuan to maintain global financial and economic stability. He also reiterated China’s commitment to a proactive fiscal policy and an accommodative monetary policy in 2025. Despite the external pressures of tariffs and the ongoing trade dispute, Beijing is trying to manage both domestic economic growth and external financial challenges without making drastic cuts to interest rates that could destabilize the yuan.
Conclusion
The People Bank of China‘s decision to keep its benchmark lending rates steady reflects the PBOC’s prioritization of financial stability over aggressive monetary easing. While the government has indicated a potential for future rate cuts, particularly to the 7-day reverse repo rate, these decisions will likely be made with careful consideration of both domestic economic factors and international trade tensions. As China navigates its complex economic landscape, maintaining the stability of the yuan and ensuring financial sustainability remains central to the People Bank of China strategy.
