China keeps key lending benchmarks unchanged as anticipated

China’s decision to keep its benchmark lending rates unchanged in August aligns with market expectations and highlights the challenges facing the country’s banking sector. The one-year Loan Prime Rate (LPR) remains at 3.35%, while the five-year LPR stays at 3.85%. The one-year LPR is critical as it serves as the reference for most loans, and the five-year LPR impacts mortgage rates.

This decision comes despite recent cuts in key interest rates in July, which marked China’s first broad easing move in nearly a year. These earlier cuts aimed to shift the People’s Bank of China’s (PBOC) monetary policy framework towards a greater focus on short-term rates to influence market expectations and stimulate economic growth.

The unchanged LPR reflects ongoing challenges for Chinese banks, including reduced interest margins that constrain their ability to lower rates further without affecting profitability. Additionally, weak credit demand and seasonal factors have led to a significant decline in bank lending, hitting its lowest level in nearly 15 years, raising concerns about the effectiveness of monetary easing in boosting the economy.

Economists suggest that China needs to supplement its monetary policy with expansionary fiscal measures to enhance domestic demand and support economic growth. They expect further easing steps, including a 25-basis-point cut in the reserve requirement ratio (RRR) in the third quarter and a 10-basis-point reduction in the policy rate in the fourth quarter. These measures are deemed necessary to maintain real GDP growth near 5% in the second half of 2024 amid ongoing economic headwinds.