China kept its benchmark lending rate for corporate and household loans the same for a ninth straight month at its January fixing on Wednesday, matching market expectations. 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. “Commercial banks left the loan prime rate on hold. But with monetary conditions already being tightened in practice and underlying inflation set to rebound, we think it is still likely that the [People’s Bank of China] opts to formally hike rates later this year,” said Julian Evans-Pritchard, senior China economist at Capital Economics. “The inaction does not come as a surprise since the [People’s Bank of China] had not adjusted the rate on its medium-term lending facility (MLF) this month as it did ahead of the past three LPR moves. This would have been the most straightforward way for the [People’s Bank of China] to influence the LPR, which is set as a spread above the MLF rate.” With the economy now expanding at the fastest pace in two years on the back of a broad-based recovery in the services sector, the [People’s Bank of China] is shifting its focus away from supporting growth back towards containing financial risks Julian Evans-Pritchard It was announced this week that China’s gross domestic product climbed by 6.5 per cent in the final quarter of 2020 from a year earlier, pushing growth to 2.3 per cent for the full year. The annual growth rate was the lowest since the Chinese economy shrank by 1.6 per cent at the end of the Cultural Revolution in 1976, but the quarterly growth was higher than the 6.0 per cent reported in the fourth quarter of 2019, before the effects of the coronavirus took hold. “With the economy now expanding at the fastest pace in two years on the back of a broad-based recovery in the services sector, the [People’s Bank of China] is shifting its focus away from supporting growth back towards containing financial risks,” added Evans-Pritchard. “It has already allowed market interbank rates to reverse most of their decline during the first half of last year and surveys suggest that quantitative controls on bank lending are being tightened. Recent comments by PBOC officials suggest that they don’t intend to follow this up with policy rate hikes just yet. “But we suspect that a rebound in producer prices and core inflation over the coming months will pave the way for some formal policy tightening. We expect [People’s Bank of China] policy rates to rise by 30 basis points in 2021, whereas most analysts think the central bank will remain on hold.”