The People's Bank of China left the one-year loan prime rate unchanged at 3.55 percent at its monthly review, in line with the consensus forecast. The equivalent five-year rate was also left on hold at 4.20 percent. These rates were both cut by 10 basis points last month.

Data published earlier in the week showed weaker quarter-over-quarter GDP growth in the three months to June, with PMI survey data also showing subdued conditions in recent months. Officials, however, described the rate cuts delivered last month as measures aimed at keeping liquidity conditions adequate rather than as a shift in the policy stance in response to economic conditions. Speaking earlier this week, PBoC Governor Yi Gang advised that monetary policy should remain prudent and indicated that officials have no intention of loosening monetary policy aggressively despite recent weakness in the economic data.

The People's Bank of China is not expected to change its loan prime rates, at 3.55 percent for the 1-year rate and 4.20 percent for the 5-year. These rates were last lowered last month, by 10 basis points each.

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.