| Consensus | Actual | Previous | |
|---|---|---|---|
| 1-Year Rate – Change | 0bp | 0bp | -25bp |
| 1-Year Rate – Level | 3.10% | 3.10% | 3.10% |
| 5-Year Rate – Change | 0bp | 0bp | -25bp |
| 5-Year Rate – Level | 3.60% | 3.60% | 3.60% |
Highlights
The People's Bank of China left both the one-year and five-year loan prime rates unchanged at 3.10 percent and 3.60 percent respectively at its monthly review today. Both rates were lowered by 25 basis points last month and by 10 basis points in July.
In their statement accompanying monthly activity data published last week, officials characterised the data as showing the economy is exhibiting"steady progress and recovery" but noted"the external environment is increasingly complicated and severe" and"effective demands are still weak at home". Officials, however, provided little guidance about whether additional changes to policy settings will be considered in the near-term.
In their statement accompanying monthly activity data published last week, officials characterised the data as showing the economy is exhibiting"steady progress and recovery" but noted"the external environment is increasingly complicated and severe" and"effective demands are still weak at home". Officials, however, provided little guidance about whether additional changes to policy settings will be considered in the near-term.
Market Consensus Before Announcement
Chinese monetary authorities cut the loan prime rate by 25 bp in last month's fixing to boost the economy. Forecasters uniformly expect no change this month in 1-year or 5-year rates.
Definition
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.
Description
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.
