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 in July.

Officials characterised monthly activity data published last weekend as showing that"the national economy maintained stability in general while making steady progress", broadly in line with comments made in recent months. However, they also cautioned that"the adverse impacts arising from the changes in the external environment are increasing, effective demands remain insufficient at home, and the 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 in July will provide sufficient support to economic conditions.

Officials are expected to hold loan prime rates unchanged at September's announcement: at 3.35 percent for the 1-year rate and 3.85 percent for the 5-year. The People's Bank of China left both rates unchanged at their August meeting after cutting them by 10 basis points each at their July meeting.

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.