The People's Bank of China, the Central Bank, has effectively frozen the Loan Prime Rate (LPR), which serves as a benchmark interest rate, for three consecutive months. This is interpreted as a 'breather' due to the reduced need for additional economic stimulus as the U.S.-China 'tariff war' has entered a 90-day truce.
The People's Bank on the 20th (local time) announced that it will maintain the one-year LPR at 3.0% and the five-year LPR, which is the benchmark for dwellings, at 3.5%, respectively. This decision aligns with market expectations.
The LPR is an average interest rate calculated from the rates of loans to the best customers of 20 Chinese commercial banks, serving as the benchmark for all financial institutions' lending rates. The People's Bank has not adjusted a separate benchmark rate for a long time, making the LPR function as the de facto benchmark interest rate.
This decision by the People's Bank to freeze rates was somewhat anticipated. Last October, China lowered the LPR by 0.25 percentage points (p) to stimulate the economy, and as downward pressure on the economy intensified due to tariffs under the second administration of Donald Trump, it further reduced the rate by 0.1%p in May. The May cut was the first rate adjustment in seven months.
Since then, it has chosen to keep rates steady for three consecutive months through June, July, and this month, opting to observe the effects of its policies. The most significant background is seen as the easing of trade tensions with the U.S. It is analyzed that this truce on tariffs, in which the U.S. and China agreed to pause additional tariff imposition for 90 days, has allowed the Chinese economy some breathing room.
Reuters evaluated that this freeze well illustrates the People's Bank's tendency to prefer targeted policies that support specific institutional sectors over a comprehensive monetary easing. In fact, the People's Bank has been utilizing other policy measures, such as a 0.5% point decrease in bank reserve requirement ratios (RRR), providing liquidity to the market.
The market predicts that for the time being, the People's Bank will maintain its stance on freezing interest rates while monitoring the progress of U.S.-China trade negotiations and domestic and international economic indicators. However, if negotiations break down or signs of economic slowdown become more pronounced, it cannot be ruled out that the People's Bank will resort to cutting rates again.