China Keeps Benchmark Lending Rates Steady

Source Credit : CNBC

China kept its benchmark lending rates steady on Monday as the country continues to grapple with weak consumer sentiment and softening growth.

The People’s Bank of China held the 1-year loan prime rate at 3.0% and the 5-year LPR at 3.5%.

LPR, normally charged to banks’ best clients, is calculated based on a survey of dozens of designated commercial banks that submit proposed rates to the central bank.

The 1-year LPR influences corporate and most household loans in China, while the 5-year LPR serves as a benchmark for mortgage rates.

The decision comes after the country announced that GDP growth in the second quarter grew at 5.2% year over year, down from 5.4% in the first quarter. This, however, was higher than the 5.1% expected by a Reuters poll of economists.

Retail sales growth in June also slowed to 4.8% from a year earlier, compared with the 6.4% year over year increase in May. That figure also fell short of the 5.4% forecast from Reuters-polled economists.

Following the move, the offshore yuan remained mostly flat, trading at 7.179 against the dollar.

In comments to CNBC after the decision, Frederic Neumann, Chief Asia Economist at HSBC, said that there is currently little perceived urgency for the PBOC to cut rates, given that GDP growth was above target.

“Moreover, with interest rates already relatively low, further easing may be less effective in driving up demand than fiscal measures,” Neumann added.

The PBOC may also want to keep some “policy powder dry for the moment,” he said, only cutting rates when the impact of U.S. tariffs on Chinese exports truly begins to bite.

That said, the PBOC could ease policy further due to lingering disinflationary pressures, while real interest rates remain relatively high, Neumann stated.