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. This rate has been left unchanged since August 2023. The equivalent five-year rate was cut by 25 basis points from 4.20 percent to 3.95 percent, a reduction much greater than the consensus forecast for a cut of 5 basis points and the biggest since the rate was introduced in 2019. This cut will lower mortgage rates for new borrowers but have little near-term impact on existing mortgage holders, as mortgage rates are generally reset on an annual basis.

This reduction in the 5-year rate follows recent moves to lower banks' reserve requirements and represents a further effort to support liquidity and boost lending in order to support economic recovery. Recent data have generally shown subdued activity and very weak price pressures in China's economy, in part reflecting the ongoing impact of the downturn in the property market. Today's move may indicate that officials now consider more decisive policy support is required to restore confidence in the property market and the economic outlook and may be followed by further policy announcements at the annual meeting of the National People's Congress early next month.

The People's Bank of China is expected to hold their 1-year loan prime rate steady at 3.45 percent but cut the 5-year rate by 5 basis points to 4.15 percent.

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.