China kept its benchmark interest rate steady for the sixteenth consecutive month on Sunday. This action comes as Chinese policymakers face increasing constraints on lowering interest rates, especially following the Federal Reserve of the United States' shift towards tighter policies.
Interest Rates Remain Unchanged
The one-year loan prime rate (LPR) was held at 3.00 percent, and the five-year interest rate was also maintained at 3.50 percent. This decision aligns with market expectations, as all 21 survey participants predicted that there would be no changes to either key rate.
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Impact of Federal Reserve Policies on China
This decision by China follows the increase in interest rates by the Federal Reserve of the United States that occurred last week, signaling further hikes in the coming months. This action has widened the gap between monetary policies of the United States and China. The yield spread on 10-year U.S. Treasury bonds compared to Chinese government bonds has approached its highest historical level.
China faces its own specific challenges, with policymakers grappling with weak credit demand and pressure on bank profitability. Pan Gongsheng, the head of the People's Bank of China, has stated that slow loan growth has become the norm as the decline in the housing sector and local governments reduces credit demand faster than emerging industries can replace it.
Serena Zhou, chief strategist for China at Mizuho, has indicated that the likelihood of an overall interest rate cut in the fourth quarter has decreased, especially in light of the Federal Reserve's more hawkish stance. This outlook may change if domestic demand in China significantly declines.
Jacqueline Rong, chief economist for China at BNP Paribas, also believes that China is nearing the end of its rate-cutting cycle. She predicts that the People's Bank of China will keep rates unchanged for the remainder of 2026, given the tight net interest margins in Chinese banks and the transition from price declines to mild inflation.
However, weaker-than-expected economic growth could increase the likelihood of further rate cuts.
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