The 1-year Loan Prime Rate (LPR) affects corporate and household loans across China, while the 5-year LPR acts as a reference point for mortgage interest rates.
This decision follows a period where GDP growth showed moderation in Q2 and retail sales figures weakened in June.
Experts from Nomura have suggested that China might need to implement additional support measures in the latter half of the year.
On Monday, China decided to keep its key lending rates unchanged as the nation continues to manage subdued consumer confidence and slowing economic expansion.
The People’s Bank of China maintained the 1-year loan prime rate at 3.0% and the 5-year LPR at 3.5%.
LPR, typically applied to banks’ most favored clients, is determined based on submissions from numerous designated commercial banks to the central bank.
The 1-year LPR impacts corporate and most household loans in China, while the 5-year LPR serves as a benchmark for mortgage rates.
This decision follows the announcement that GDP growth in Q2 reached 5.2% year-over-year, down from 5.4% in Q1. However, this figure exceeded the 5.1% expected by a Reuters economist poll.
Retail sales growth in June also slowed to 4.8% year-over-year, compared with the 6.4% year-over-year increase in May. This figure also fell short of the 5.4% forecast from Reuters-polled economists.
Following the announcement, the offshore yuan remained largely unchanged, trading at 7.179 against the dollar.
In comments to CNBC after the decision, Frederic Neumann, Chief Asia Economist at HSBC, noted that there is currently little perceived urgency for the PBOC to reduce rates, given that GDP growth was above target.
“Additionally, with interest rates already relatively low, further easing might be less effective in boosting demand than fiscal measures,” Neumann added.
The PBOC may also want to keep some “policy powder dry for the moment,” he said, only reducing rates when the impact of U.S. tariffs on Chinese exports truly begins to affect the economy.
That said, the PBOC could ease policy further due to ongoing disinflationary pressures, while real interest rates remain relatively high, Neumann stated.
The ‘demand cliff’
Analysts from Nomura said in a July 9 note that while current economic indicators are holding up, economic fundamentals could “worsen visibly” in the second half of the year.
The analysts indicated that demand could become significantly weaker on multiple fronts, adding that asset prices could face renewed pressure and market interest rates could moderate further.
As such, they believe that Beijing “will very likely rush to roll out a new round of supportive measures at some point during [the second half of the year].”
Nomura noted that the country was facing a “demand cliff” in the second half of the year, due to factors including an export slowdown resulting from U.S. tariffs and sales declines in the key property sector.
“Amid these negative drivers, the fiscal situation across most cities could deteriorate further. We expect GDP growth to drop to 4.0% year-over-year in H2 from around 5.1% in H1.”
— News Original —
China keeps benchmark lending rates steady as economic growth stays strong
The 1-year LPR influences corporate and most household loans in China, while the 5-year LPR serves as a benchmark for mortgage rates.
This comes after softer GDP growth was seen in the second quarter and weaker retail sales in June.
Analysts from Nomura said that China may be forced to enact support measures in the second half of the year.
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.
The ‘demand cliff ‘
Analysts from Nomura said in a July 9 note that while current economic indicators are holding up, economic fundamentals could “worsen visibly” in the second half of the year.
The analysts said that demand could turn much weaker on multiple fronts, adding that asset prices could come under renewed pressure and market interest rates could moderate further.
As such, they think that Beijing “will very likely rush to roll out a new round of supportive measures at some point during [the second half of the year].”
Nomura said that the country was facing a “demand cliff” in the second half of the year, due to factors including an export slowdown resulting from U.S. tariffs and sales declines in the key property sector.
“Amid these negative drivers, the fiscal situation across most cities could deteriorate further. We expect GDP growth to drop to 4.0% y-o-y in H2 from around 5.1% in H1.”