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China kept its benchmark lending rates unchanged on Friday, signaling a cautious policy stance after implementing monetary easing measures last month. The one-year loan prime rate (LPR) remains at 3.00%, while the five-year LPR stays at 3.50%, in line with market expectations.
This decision follows recent signs of easing tensions between the U.S. and China after a trade framework was agreed upon in London. Analysts believe this reduced the immediate need for further stimulus while allowing Beijing to preserve policy tools amid ongoing geopolitical and economic uncertainties.
In May, China cut LPRs for the first time since October and state banks lowered deposit rates to reduce borrowing costs. However, continued weakness in exports, sluggish credit growth, and mounting deflationary pressure are raising concerns about the recovery of the world’s second-largest economy.
The one-year LPR is the benchmark for most loans, while the five-year rate affects mortgage pricing. Economists suggest that instead of further rate cuts, China may lean towards liquidity support to protect bank profitability. According to DBS, a modest 20-basis-point rate cut could push banks’ net interest margins down to 1.45% by year-end, putting pressure on financial institutions.
As a result, analysts expect the People’s Bank of China to opt for a 50-basis-point cut to the reserve requirement ratio (RRR), potentially injecting 1 trillion yuan into the financial system. This move would bolster liquidity without further squeezing banks’ margins, helping to stabilize lending and support economic momentum.
By maintaining current rates and favoring liquidity tools, China appears to be balancing the need for economic support with the risks of financial stress, especially as it navigates complex global dynamics and domestic headwinds.
