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 for the third consecutive month after it was cut by 25 basis points in February.

Officials characterised monthly data published last week as showing that"the national economy was generally stable and continued to rebound and progress well". Although they acknowledged growth in some indicators moderated, they attributed this to the impact of lunar new year holidays and base effects. Officials also warned, however, that"the external environment is becoming more complex, severe and uncertain" and that the domestic economy still faces"multiple difficulties and challenges". They noted that they will seek to"frontload and effectively implement" macroeconomic policies that have already been introduced. This assessment and today's decision suggest that they do not yet see a case for a major shift in policy settings.

After holding steady in April, the People's Bank of China is expected to hold rates unchanged again at its May's meeting: at 3.45 percent for the 1-year rate and 3.95 percent for the 5-year.

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.