China’s decision to hold its benchmark lending rates steady at Tuesday’s monthly fixing was in line with market expectations. The one-year loan prime rate (LPR) remains at 3.35%, while the five-year LPR is maintained at 3.85%. This stability follows a series of key rate cuts made a month earlier, aimed at bolstering economic growth.

The unchanged rates reflect a period of cautious policy-making by the People’s Bank of China (PBOC). Despite the PBOC’s previous broad rate cuts in July—its first major adjustment in almost a year—ongoing challenges in the financial sector have constrained further easing efforts. The one-year LPR is commonly used for new and outstanding loans, whereas the five-year rate is crucial for mortgage pricing.

According to a Reuters survey of 37 market participants conducted earlier this week, all respondents anticipated that both rates would remain unchanged. This forecast aligns with the current state of China’s lending environment, where shrinking interest margins at banks have tempered further easing.

China’s recent rate cuts surprised market observers and signaled a shift in the PBOC’s monetary policy framework, with a focus on short-term rates as the primary market signal. However, the impact on lending has been less than expected. Last month, China experienced a significant drop in bank lending, reaching its lowest level in nearly 15 years due to weak credit demand and seasonal factors.

Goldman Sachs economists noted, “The expansionary fiscal policy, along with other support including continued monetary policy easing, is needed to stem further weakening in domestic demand and to ensure real GDP growth stays close to 5% year-on-year in the second half of this year. We believe the growth target is important to the authorities and recent policy communications have indicated so.” They anticipate a 25-basis-point reserve requirement ratio (RRR) cut in the third quarter, with an additional 10-basis-point policy rate cut in the fourth quarter.

Overall, while China’s decision to maintain current LPR levels reflects a stabilization approach, the broader economic conditions suggest that further adjustments might be necessary to support sustained growth.

(Adapted from CNBC.com)

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