FX.co ★ China Keeps Benchmark Lending Rates On Hold

On Friday, China maintained its benchmark lending rates, despite the U.S. Federal Reserve's unexpected decision to cut its rate by half a percentage point earlier this week.

The People's Bank of China (PBoC) left the one-year loan prime rate (LPR) steady at 3.35 percent, while the five-year LPR, which serves as the benchmark for mortgage rates, remained at 3.85 percent. This follows the last reduction in July when the LPR was lowered by 10 basis points.

The PBoC adjusts the LPR monthly based on submissions from 18 designated banks, although Beijing does exert significant influence over these decisions. The LPR replaced the traditional benchmark lending rate in August 2019.

Despite an evident need for monetary policy easing, today's decision to hold rates highlights the PBoC's concerns over bank profitability and falling long-term bond yields, according to economists at Capital Economics.

"Before they can implement rate cuts, they might need to alleviate pressure on banks by lowering reserve requirements, which we anticipate happening soon," the economists noted.

They further observed that any monetary policy easing in the coming quarters is likely to be modest and insufficient to significantly boost private sector demand. Meanwhile, the U.S. Federal Reserve on Wednesday cut its benchmark rate by 50 basis points, marking the first reduction in over four years.

On Thursday, the Bank of England kept its bank rate at 5.00 percent following a quarter-point cut in August. Earlier today, the Bank of Japan also left its key rate unchanged after a hike in July.