China’s central bank said, with no change, its one-year Loan Prime Rate (LPR) stayed at 3.1 percent while keeping its five-year LPR at 3.6 percent for stability in its economy while in economic hardship.
This is at a time when the U.S. Federal Reserve has cut the interest rate by 25 basis points and has revised its forecast to fewer cuts in 2025 to just two.
Analysts tend to believe that Fed insights will not alter the focus of monetary policy in China but may force the yuan.
Key Background:
On December 19, the central bank in China kept its benchmark lending rates unchanged, as expected, as the nation faces several economic growth issues and, at times, a weakening yuan. The People’s Bank of China left one-year and five-year loan prime rate (LPR), unchanged, at 3.1% and 3.6%, respectively. According to analysts, these percentages impact corporate loans and lend rates to the household category and for mortgage use, mainly based on LPRs for a five year. The decision was widely anticipated. This comes after the U.S. Federal Reserve earlier cut its interest rate by 25 basis points, during which it also announced fewer future interest rate cuts than initially anticipated. The Fed indicated it intended to reduce interest rates for only two times in the year 2025 whereas it had earlier forecasted cuts for four times in that year.
Although the Fed may have softened rates into negative territory, the position it currently holds is unlikely to change the policy direction significantly from the PBOC. It can be argued that with steady rates, the central bank wants to keep a hold on the yuan since this currency has been subject to global trends. Farzin Azarm, head of equities trading at Mizuho Americas, said the PBOC is unlikely to respond aggressively to defend the yuan, as exchange rate moves are more influenced by broader interest rate movements – especially in the U.S.
Earlier in December, Chinese officials said they were going to do further monetary easing, which includes interest rate cuts to strengthen the country’s battered economy. Even with the series of stimulus measures undertaken since September, China continues to face persistent deflationary forces, weak consumer demand and a slow property market. Going ahead, analysts see room for the PBOC to cut rates even deeper; however, fiscal policies would be more important in taking Chinese recovery forward in 2025.
