China Effectively Holds Benchmark Interest Rate and LPR Steady in February

People's Bank of China [Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] The People's Bank of China, the central bank of China, effectively kept the benchmark lending prime rate (LPR) unchanged in February.

On the 21st, the People's Bank of China announced that the one-year LPR for February was recorded at 3.7%, the same as the previous month. The five-year LPR, which affects mortgage loans, also remained at 4.6%, the same level as the previous month.

The People's Bank of China had lowered the LPR for two consecutive months prior. In December last year, the one-year LPR was cut by 0.05 percentage points, and in January this year, the one-year LPR was lowered by 0.1 percentage points and the five-year LPR by 0.05 percentage points. The cut in the LPR in December last year was interpreted as a signal of stimulus measures in response to the increased risk of economic slowdown due to the real estate market slump following the Evergrande Group default, marking the first cut in 20 months since April 2020. The decision to keep the rate unchanged in February is seen as an intention to monitor future trends after two consecutive months of rate cuts.

Although the LPR nominally reflects the trend of market mortgage loans, the People's Bank of China directly influences the formation of the LPR by utilizing various monetary policy tools and policy guidance functions, so it is generally regarded that the central bank effectively determines the LPR.

Governor Yi Gang of the People's Bank of China said in an interview ahead of the G20 Finance Ministers and Central Bank Governors meeting last week that the bank would maintain an accommodative monetary policy stance this year. Governor Yi emphasized the need for stimulus policies, stating, "China's economic growth rate this year will be at the level of potential growth." In a report from March last year, the People's Bank of China projected a five-year potential growth rate of 5 to 5.7% through 2025. Therefore, Governor Yi's remarks are interpreted as a commitment to maintain a stimulus stance in anticipation of the economic growth rate slowing from 8.1% last year to the 5% range this year.

The Chinese government is highly likely to take active measures to prevent a sharp economic slowdown this year. This is because the 20th Party Congress, a major political event that will open the door for President Xi Jinping's long-term rule, is scheduled for this fall.

Accordingly, there is speculation that the economic policy, which has begun to lean toward growth support since the end of last year, will be further intensified around next month's Two Sessions (Lianghui: the National People's Congress and the Chinese People's Political Consultative Conference), which will determine China's economic direction this year.

With the United States expected to begin a full-scale benchmark interest rate hike starting in March, experts anticipate that the monetary policy directions of China and the U.S. will diverge this year, leading to a widening gap in benchmark interest rates between the two countries.

This content was produced with the assistance of AI translation services.