The People's Bank of China left the one-year loan prime rate unchanged at 3.45 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. The one-year rate was cut by 10 basis points in August.

Data published last week showed relatively steady year-over-year and month-over-month growth in key activity indicators in October. PMI surveys and inflation data published earlier in the month also showed relatively steady but subdued conditions. Ongoing weakness in the property market, however, continues to weigh on overall activity. Officials characterised last week's data as evidence that China's economy"sustained the good momentum of recovery" in October, with their assessment providing little indication that they believed substantial changes to policy settings are required.

Like October, the People's Bank of China is expected to hold its 1- and 5-year loan rates unchanged at 3.45 and 4.20 percent respectively. These rates were last cut in August.

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.