The People's Bank of China lowered the one-year loan prime rate by 10 basis points from 3.55 percent to 3.45 percent at its monthly review, close to the consensus forecast for a cut of 15 basis points. The equivalent five-year rate, however, was left on hold at 4.20 percent, contrary to the consensus forecast for a cut of 15 basis points. These rates were last lowered in June by 10 basis points.

Today's reduction in the one-year rate follows similar reductions made last week to the rate on the one-year medium-term lending facility and the reverse repo rate. These moves follow the publication of data showing weak domestic activity and trade data and a return to consumer price deflation in July.

Officials have characterised recent changes in policy settings as adjustments designed to manage liquidity conditions rather than a change in the stance of monetary policy. Nevertheless, officials have noted recent volatility in economic conditions and that the economy is currently facing"difficulties and challenges". Although adjustments to policy settings have so far been relatively modest, the moves made over the last week may indicate that officials are more concerned about the outlook and may consider further policy support in coming weeks.

Facing a run of disappointing economic data, the People's Bank of China is expected to both cut its 1-year and 5-year loan prime rates, by 15 basis points each to 3.40 and 4.05 percent, respectively. These rates were last lowered in June, 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.