The People's Bank of China lowered both the one-year and five-year loan prime rates by 25 basis points to 3.10 percent and 3.60 percent respectively at its monthly review today. Both rates were also reduced by 10 basis points in July.

Today's reductions in the loan prime rates follow a series of policy measures announced by Chinese officials in recent weeks in response to ongoing weakness in the property sector and sluggish growth in consumer spending and manufacturing output. Officials had already lowered the seven-day reverse repo rate, cut banks' reserve requirements, and announced government spending planned for next year would be brought forward.

In their statement accompanying the publication of economic data last week, officials assessed that the economy is"generally stable with steady progress" but noted"the complicated and severe external environment" and"new problems of domestic economic development". Officials, however, provided little guidance about whether additional changes to policy settings will be considered in the near-term.

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.