China holds loan prime rate at historic lows for 7 straight months

By Ambar Warrick

Investing.com — China’s central bank held its key loan prime rate (LPR) at record lows on Monday, keeping monetary conditions largely accommodative as the country moves to support a fledgling economic recovery and stem losses in the yuan.

The People’s Bank of China (PBOC) held its at 3.65%, while the five-year LPR, which is used to determine mortgage rates, was maintained at 4.30%. Both lending rates were at their lowest in the past two decades.

The move was largely as expected by analysts. The LPR is decided by the PBOC based on considerations taken from 18 designated commercial banks, and is in turn used as a benchmark by private banks in offering loans.

The PBOC’s move also comes amid a sudden loosening in global monetary conditions, after the Federal Reserve and several other central banks announced emergency liquidity measures to prevent a potential banking crisis. 

But China had late last week unexpectedly cut its (RRR) for banks by 25 basis points, giving local lenders more cash they can use for operations. This allows banks to lower interest rates, which, coupled with consistent liquidity injections by the PBOC, is expected to significantly loosen monetary conditions. 

The rose slightly against the dollar, also benefiting from bets on a less hawkish Federal Reserve. 

The cut in the RRR is expected to herald a potential trimming in the LPR this year, as the country moves to shore up economic growth after the lifting of anti-COVID measures earlier this year.

So far, economic indicators have painted a mixed picture of a Chinese recovery. While business activity roared back after the lifting of curbs, China’s manufacturing sector is still performing well below capacity.

The country also faces slowing overseas demand for Chinese goods due to weak global economic conditions, which could further pressure the manufacturing sector.

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