China kept its main benchmark lending rates unchanged on Friday, as Beijing faces the challenge of bolstering economic growth while backstopping a weakening yuan.
The People’s Bank of China said it would steady the one-year loan prime rate at 3.1%, with the five-year LPR at 3.6%. The 1-year LPR affects corporate and most household loans, while the 5-year LPR serves as a reference for mortgage rates. The move was expected according to a Reuters poll of 27 economists.
The rate decision came on the back of a widely-expected 25-basis-points rate cut by the U.S. Federal Reserve on Wednesday. The Fed also indicated it will only reduce interest rates twice in 2025, fewer than the four cuts in its September meeting’s projection.
Analysts said the Fed’s revised outlook on future rate cuts is unlikely to have a huge influence on the trajectory of policy easing by China’s central bank, although it could put pressure on the Chinese yuan.
It seems that the PBOC is not stepping in to defend the yuan, Farzin Azarm, managing director of equities trading at Mizuho Americas told CNBC’s “Street Signs Asia” on Friday.
“But really, what’s the point? ... I think at this point, it really is a function of what rates are doing. I think it’s really a function of what the curve is doing in the U.S. And I think the central bank’s going to let it play out, to be perfectly honest with you,” said Azarm.
Earlier this month, Chinese top officials pledged at top economic agenda-setting meetings to ramp up monetary easing measures, including implementing interest rate reductions, to shore up the ailing economy.
The PBOC kept the one-year and five-year LPRs unchanged in November, following a widely-anticipated 25bp-cut in October. The central bank had surprised the markets by shaving the major short and long term lending rates in July.
Major investment banks and research firms forecast the Chinese yuan would weaken further next year, in anticipation of President-elect Donald Trump following through with his tariff threats.
Despite a flurry of stimulus measures since late September, latest economic data out of China showed the country is still contending with entrenched deflation, amid tepid consumer demand and a protracted property market slump.
The Fed’s easing cycle going forward will create “some room for the PBOC to follow up,” Yan Wang, chief emerging markets and China strategist at Alpine Macro told CNBC’s “Street Signs Asia” on Thursday, while stressing that fiscal easing will play a more critical role in driving the Chinese economy next year.
In a note to CNBC on Friday, Wang said he believed the PBOC should continue cutting rates to alleviate the yuan’s deflationary pressure against other currencies.
“Meanwhile, the Chinese government possesses greater fiscal flexibility and is likely to rely more on fiscal measures to stimulate growth,” he added.
— CNBC