In line with the People’s Bank of China’s (PBOC) decision to maintain its policy rates, Chinese commercial banks have decided to keep their benchmark lending rates unchanged.
What Happened: As per a report from Bloomberg, commercial lenders in China have kept the one-year loan prime rate at 3.45% and the five-year rate, which is a benchmark for mortgages, at 4.2%. The PBOC has held policy rates stable, choosing alternative methods to stimulate expenditure.
The offshore yuan marginally increased its gains to 0.2% following the announcement, reaching a three-month high. The loan rates of PBOC are determined based on the interest rates that the top 18 banks offer their prime customers, quoted as a spread over the central bank's one-year policy rate or the medium-term lending facility rate
Last week, the PBOC chose to maintain the medium-term lending facility rate after reducing it in June and August. Instead of reducing the interest rate, the PBOC infused the largest amount of cash into the financial system since 2016 via its one-year loans to meet liquidity requirements.
Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp., said “Quantitative measures – liquidity injections – are still preferred over outright interest rate cuts to stimulate economic activities.”
Why It Matters: The decision has led to speculations about whether the PBOC will reduce the reserve requirement ratio for banks before the end of this year. Economists at Citigroup Inc. suggested that last week’s move might delay the RRR cut until 2024.
The decision of commercial banks to keep the lending rates unchanged aligns with the PBOC’s strategy to use liquidity injections rather than interest rate cuts to stimulate economic activities. This approach is expected to provide more flexibility in managing the country’s economy amid the ongoing global financial uncertainties.
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