The People's Bank of China lowered the one-year loan prime rate by 10 basis points from 3.65 percent to 3.55 percent at its monthly review, in line with the consensus forecast. The equivalent five-year rate was also cut by 10 basis points from 4.30 percent to 4.20 percent. These rates were last lowered in August 2022 by 5 basis points and 15 basis points respectively.

These rate reductions follow similar moves last week to lower short-term and medium lending rates. Officials advised that these adjustments to policy settings are designed to"keep the liquidity in the banking system adequate at a reasonable level" rather than signalling a major shift in the stance of monetary policy. Nevertheless, recent data have generally shown subdued economic activity and weak price pressures, suggesting that officials are concerned that China's economy requires additional policy support.

Comments from PBoC Governor Yi Gang published earlier in the month indicated that officials remain confident that both economic activity and price pressures will pick up in the second half of the year. He reiterated that monetary policy will be kept"stable" while arguing there is"ample policy room" to support economic recovery.

After last week lowering the 1-year medium-term lending facility rate by 10 basis points to 2.65 percent and its 7-day reverse repo rate by 10 basis points to 1.90 percent, the People's Bank of China is expected to also cut its loan prime rates by 10 basis points each, to 3.55 percent for the 1-year rate and to 4.20 percent for the 5-year. These rates were last lowered in August 2022 by 5 basis points and 15 basis points respectively.

The one-year Loan Prime Rate is a new policy rate set by the People’s Bank of China that is used by domestic banks as a reference for the lending rates they offer to their most creditworthy clients. This rate was previously based on the official benchmark rate that required the approval of China’s State Council to be changed but is now based on the PBOC’s medium-term lending facility, which can be changed without the State Council’s approval. New bank loans are now priced relative to the Loan Prime Rate.

The People’s Bank of China determines interest rate policy at its policy meetings. These meetings occur on or around the 20th of each month and market participants speculate about the possibility of an interest rate change. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.