People's Bank of China Takes Cautious Steps in Easing... Loan Preferential Rates Frozen for Four Consecutive Months (Comprehensive)

1-Year LPR Frozen at 3.45%
Economic Recovery Monitored Despite Deflation Concerns

Despite concerns about deflation, the People's Bank of China is taking a cautious approach to monetary easing by keeping interest rates unchanged. This is interpreted as a decision made with the weakening yuan and capital outflows in mind.

On the 20th, the People's Bank of China announced that it would keep the 1-year Loan Prime Rate (LPR) at 3.45% and the 5-year LPR at 4.20%. Since the measure announced on August 21 to cut the 1-year LPR by 0.1 percentage points while keeping the 5-year LPR unchanged, the same rates have been maintained for four consecutive months starting in September. The 5-year rate has been fixed for six months.

[Image source=Yonhap News]

The LPR is calculated by aggregating the loan rates offered to prime customers by 18 designated banks. Local financial institutions use this as a benchmark for lending, so it functions as an effective benchmark interest rate. The 1-year rate affects general loans, while the 5-year rate impacts mortgage loans.

China has recently seen a continued decline in prices, raising concerns about deflation. According to the National Bureau of Statistics of China, the Consumer Price Index (CPI) in November fell by 0.5% year-on-year, marking two consecutive months of negative growth following the previous month. Non-food prices dropped by 0.4%, while food prices fell sharply by 4.2%. Notably, pork prices, which hold a significant weight in the CPI, plunged by 31.8%. The Producer Price Index (PPI) for November, released on the same day, also declined by 3.0% year-on-year. China's PPI has been negative for 14 consecutive months since October last year (-1.3%).

[Image source=Yonhap News]

This decision to keep rates steady is seen as a response to the recent weakening of the yuan, capital outflows, and banking sector stability. In particular, with retail sales and industrial production showing signs of recovery excluding inflation, the authorities appear to prefer observing the effects of existing policies rather than making aggressive monetary interventions. Industrial production last month rose 6.6% year-on-year, significantly exceeding forecasts (5.6%) and the previous month’s figure (4.6%), while retail sales increased by 10.1% year-on-year, marking the largest gain in six months since May (12.7%).

Meanwhile, Wang Yiming, a member of the People's Bank of China's Monetary Policy Committee, recently hinted at the possibility of interest rate cuts. He suggested that with China's low inflation levels and the increasing likelihood that the U.S. Federal Reserve will end its rate hikes, the People's Bank of China might lower rates.

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