China keeps benchmark rates unchanged amid signs of economic stabilisation

China has maintained its benchmark lending rates at their current levels during the monthly fixing on Wednesday, aligning with expectations. The decision comes as the country experiences indications of economic stabilization and a depreciation of the yuan, which has lessened the immediate necessity for monetary easing. The world’s second-largest economy as per recent economic data showed a gradual recovery from a slowdown. Further, the weakening yuan has diminished the pressure on authorities to lower interest rates in order to support economic growth aggressively. WATCH: China’s Economy is Slowing Down. Here’s Why | Vantage with Palki Sharma

Consequently, the one-year loan prime rate (LPR) remained at 3.45%, and the five-year LPR kept unchanged at 4.20%. The one-year LPR serves as the basis for most new and existing loans in China, while the five-year rate plays a role in determining mortgage pricing. In a Reuters survey of 29 market analysts and traders, all participants predicted no change to the one-year LPR, while most of them also expected the five-year rate to remain steady. The steady LPR fixings follow the central bank’s decision last week to roll over maturing medium-term policy loans and keep interest rates unchanged. The medium-term lending facility (MLF) rate serves as a guide to the LPR and markets see it as a precursor to any changes to the lending benchmarks. Widening yield differentials with other major economies, particularly the United States, and faltering domestic growth have pressured the Chinese yuan down more than 5% against the dollar this year, prompting authorities to ramp up efforts to rein in the weakness. More attention should be given to the exchange rate of the yuan against a basket of currencies, Zou Lan, a China central bank official said at a news conference on Wednesday. Zou said China will curb market disruptions, correct one-sided yuan moves and guard against the risk of the currency overshooting. “Monetary policy rollout maintains its steady pace, and there are still chances for reductions to LPRs next month,” said Xing Zhaopeng, senior China strategist at ANZ. “Net interest margin is not an obstacle for rate cuts as banks have lowered deposit rates.” Xing added that economic data will continue to improve in the fourth quarter and that the low base effect will ensure growth exceeds 5%. “The policy impact will extend to the next few quarters. We have revised our 2023 and 2024 GDP forecast up to 5.1% and 4.2%,” he said. China’s central bank last week lowered the amount of cash banks must hold as reserves for a second time this year to boost liquidity and support the economic recovery. Despite the steady LPR, some market watchers said recent property easing measures suggest cuts to the five-year LPR and more policy stimulus are likely in coming months. “Looking forward, we expect property sales volume to stabilise gradually at low levels in the coming months, infrastructure investment to grow at a robust but slower pace on a high base,” said Wang Tao, chief China economist at UBS. “We maintain our real GDP growth forecast of 4.8% for full-year 2023. The development of property downturn, the magnitude and pace of policy easing still remain the biggest uncertainty for future growth trajectory.” China cut the one-year benchmark lending rate in August but surprised markets by keeping the five-year rate unchanged. With inputs from Reuters.