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China central bank again maintains reference rate for new loans

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China central bank again maintains reference rate for new loans

The People's Bank of China maintained its reference point for new loans for the second consecutive month in January.

The central bank's one-year loan prime rate stands at 4.15% and the five-year rate remains at 4.80%. The PBoC last lowered the rate by 5 basis points in November 2019.

The loan prime rate acts as the reference point for interest rates on new loans granted by banks and is linked to the medium-term lending facility, which sets the cost of the loans that the PBoC offers to the country's lenders.

The central bank ordered financial institutions Dec. 28, 2019, to adopt the loan prime rate, or LPR, as the new benchmark to price existing floating-rate loans starting this year.

"We had thought that the recent decline in bank funding costs from the latest RRR cut and fall in short-term interbank rates might convince banks to lower their LPR quotations," said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note, adding that the PBoC seems to have adopted a "wait-and-see approach."

"But with a slowdown in property construction only just getting underway, we are skeptical that the latest uptick in economic activity marks the start of a sustained turnaround," Evans-Pritchard added. He expects a 50-basis-point cut in the LPR, "with growth likely to come under renewed pressure."