The People's Bank of China left the one-year and five-year loan prime rates unchanged at 3.35 percent and 3.85 percent respectively at its monthly review, in line with the consensus forecast. Both rates were reduced by 10 basis points last month.

Officials characterised monthly activity data published last week as showing that"the national economy was generally stable with steady progress", as they did last month. However, they also cautioned that"the adverse impact brought by external environment is increasing, effective demands remain insufficient at home, pains are caused while old growth drivers are replaced by new ones, and sustained economic recovery is still confronted with multiple difficulties and challenges". Officials provided little guidance about whether additional policy measures would be considered in the near-term, and today's decision to leave loan prime rates on hold suggest they currently believe that the reductions implemented last month will provide sufficient support to economic conditions.

After unexpectedly cutting both the 1-year and 5-year loan prime rates by 10 basis points at their July meeting, officials are expected to hold rates unchanged at August's announcement, at 3.35 percent for the former and 3.85 percent for the latter.

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.