China, as expected, is leaving benchmark lending rates unchanged

SHANGHAI/SINGAPORE, Oct 20 (Reuters) – China left benchmark mortgage rates unchanged at Friday’s monthly fixing, in line with market expectations as a set of economic data suggests a stabilizing economy and a weaker yuan limits further monetary easing.

The prime rate for one-year loans (LPR) was maintained at 3.45%, while the five-year LPR remained unchanged at 4.20%.

Better-than-expected third-quarter gross domestic product (GDP) and retail sales data suggest China’s economic recovery has started to improve and requires less monetary support.

“Economic activity has stabilized and authorities can afford to wait a while before introducing further monetary easing,” emerging market analysts at TD Securities said in a research note.

Bearish sentiment towards the yuan was also seen as a factor against further interest rate cuts. The yuan has weakened by more than 5% against the dollar this year, and rising liquidity would increase pressure on the currency.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the price of mortgage loans.

In a Reuters poll of 29 market analysts and traders, almost all participants predicted no change in the one-year LPR rate, while all expected the five-year rate to remain unchanged.

The permanent LPR arrangements follow the central bank’s decision on Monday to refinance maturing medium-term loans covered by the lending policy, while keeping their interest rates unchanged.

The medium-term lending rate (MLF) serves as a guide to the LPR, and markets view it as a precursor to any changes in lending benchmarks.

While rates remained unchanged, the PBOC on Monday injected the largest cash support since late 2020 to enable banks to extend credit at a time when financing conditions were tight due to a large supply of bonds and government tax payments.

Market participants do not rule out the possibility of reducing interest rates in the coming months.

Barclays economists expect new cuts in key interest rates of 10 basis points in the fourth and first quarters of next year, amid persistent deflation risks and weak domestic demand.

China cut its one-year benchmark lending rate in August but surprised markets by keeping its five-year interest rate unchanged.

So far this year, 1-year and 5-year LPRs have been reduced by 20 bp and 10 bp, respectively.

The LPR rate, which banks typically charge their best customers, is set by 18 designated commercial banks, which submit proposed rates to the central bank every month.

Our standards: The Thomson Reuters Trust Principles.