China keeps loan rate steady for third straight month with ‘inaction not surprising’ as economy improves
- The one-year loan prime rate (LPR) was kept unchanged at 3.85 per cent, while the five-year LPR remained at 4.65 per cent
- Official data showed China’s economy grew 3.2 per cent in the second quarter from a year earlier, faster than the 2.5 per cent expected by analysts
China kept its benchmark lending rate steady for the third straight month on Monday, matching market expectations, amid signs that the world’s second-largest economy is recovering from the shock coronavirus pandemic.
The one-year loan prime rate (LPR) was kept unchanged at 3.85 per cent, while the five-year LPR remained at 4.65 per cent.
Most new and outstanding loans are based on the LPR, while the five-year rate influences the pricing of mortgages.
Thirty-four out of 36 participants in a Reuters survey had expected no adjustment to LPR in July after the People’s Bank of China (PBOC) kept borrowing cost on medium-term lending facility (MLF) unchanged last week.
“The inaction is not surprising: the PBOC did not lower the rate on its medium-term lending facility (MLF) this month as it did ahead of the past three LPR cuts,” said Martin Rasmussen, China economist and Capital Economics.
“This would have been the most straightforward way for the PBOC to push down the LPR, which is set as a spread above the MLF rate. The PBOC has also allowed market interbank rates to rise in the past two months, which will have made banks more reluctant to lower their lending rates.”
MLF, one of the PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR.
The interest rate on one-year MLF loans to financial institutions also stayed unchanged at 2.95 per cent for three straight months.
The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August 2019, loosely pegging it to the MLF rate.
“Economic activity continued to strengthen going into quarter three, and fiscal policy is set to boost activity for the remainder of the year,” added Rasmussen.