China Unexpectedly Keeps Lending Rates Steady; Markets Anticipate Cuts Soon – By Reuters

SHANGHAI (Reuters) – China unexpectedly maintained its benchmark lending rates during the monthly fixing on Friday, surprising market observers who anticipated a change following a significant interest rate cut by the Federal Reserve earlier this week.

Despite this decision, many analysts believe that further stimulus measures will likely be implemented to support an ailing economy, as the Fed’s easing provides Beijing with the flexibility to relax its monetary policy without significantly impacting the yuan’s value.

The one-year loan prime rate (LPR) remains at 3.35%, while the five-year LPR is unchanged at 3.85%. A recent survey of 39 market participants revealed that 69% expected both rates to be lowered.

"The anticipated rate cut is likely to form part of a broader policy initiative currently under review by senior officials," stated Xing Zhaopeng, a senior strategist at ANZ, referencing Chinese policymakers. He added, "Current economic indicators and expectations strongly favor a rate cut. Lowering existing mortgage loan rates would also necessitate reductions in the five-year LPR, potentially causing a significant one-time decline later this year."

Recent economic data from August, including credit lending and other activity indicators, fell short of expectations, amplifying the urgency for additional stimulus in the world’s second-largest economy.

Economists and policy advisors expect the Chinese government to intensify measures to ensure that the economy meets its increasingly difficult growth target for 2024. The slowdown in economic activity has led global financial institutions to revise their growth forecasts for China for next year, bringing them below the government’s target of approximately 5%.

President Xi Jinping recently encouraged authorities to work towards achieving the country’s annual economic and social development objectives, as reported by state media, highlighting the need for more actions to facilitate a sluggish economic recovery.

Analysts at Commerzbank noted, "There is a strong possibility that the People’s Bank of China (PBOC) will soon reduce rates and that banks will lower their LPRs accordingly. Sluggish growth necessitates easing monetary policy, and the Fed’s rate cuts provide the PBOC with an opportunity to respond."

For the past two years, the divergence in monetary policy with other major economies, particularly the United States, along with the weakening economic conditions, have posed significant barriers to Beijing in loosening its monetary policy.

Experts suggest that the recent 50-basis-point cut by the U.S. central bank has given China additional policy options. Most new and outstanding loans in China are linked to the one-year LPR, while the five-year rate predominantly affects mortgage pricing.