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 also left on hold at 3.95 percent after it was lowered by 25 basis point last month.

Key activity published earlier this week showed growth in industrial production and investment picked up in the first two months of the year. Retail sales growth, however, weakened. PMI survey data have shown weakness in the manufacturing sector but modest growth elsewhere in the economy. Officials characterised this week's data as evidence that"the national economy maintained the momentum of recovery and growth" and today's decision to keep loan prime rates unchanged suggest the PBoC remains confident that current policy settings are broadly appropriate.

After cutting the 5-year loan prime rate by a deeper-than-expected 25 basis points in February, the People's Bank of China is expected to hold the rate unchanged at 3.95 percent at its March meeting. The 1-year rate, which was left unchanged in February, is also expected to remain unchanged at 3.45 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.