PBOC keeps 1-year LPR at 3% for 14th straight month

China's central bank held its benchmark lending rate at 3% for a 14th consecutive month, showing reluctance to deploy broad-based monetary easing even as the economy grew at its slowest pace in more than three years.

The People's Bank of China kept its one-year loan prime rate at 3% for a 14th straight month on Monday, defying calls for stimulus after second-quarter GDP expanded at the weakest pace since late 2022. The five-year LPR, the reference for mortgages, also held at 3.5%.

"The weaker-than-expected Q2 GDP data have increased somewhat the likelihood of further monetary easing, although rate and RRR cuts this year are still not in our baseline," said Xinquan Chen, an economist at Goldman Sachs.

The decision matched the unanimous forecast in a Reuters survey of 23 market participants. The one-year rate has sat at 3% since May 2025, while the five-year has remained at 3.5% over the same stretch. The PBOC now leans on its seven-day reverse repo rate — held at 1.4% since a 10-basis-point cut on May 9, 2025 — as its main policy lever, with the LPR and medium-term lending facility playing supporting roles, Governor Pan Gongsheng flagged in mid-2024.

The hold reflects a balancing act. China's economy expanded 5% in the first quarter, at the top of its target range, before cooling to 4.3% in the second quarter — the weakest pace in three and a half years. Policymakers appear wary of squeezing bank margins or pressuring the yuan, especially as Middle East tensions push oil prices higher, importing inflation. Attention now shifts to the upcoming Politburo meeting, where senior leaders are expected to outline economic priorities for the second half of the year.

The PBOC's reluctance to cut comes despite persistent weakness in domestic demand. Consumer spending remains subdued as falling property values and employment concerns weigh on household confidence. New bank lending stayed weaker than expected, with short-term household loans continuing to contract, highlighting the limited effectiveness of lower borrowing costs when confidence is low.

The divergence between resilient exports — driven by electric vehicles, batteries and solar equipment — and weak domestic consumption has created a K-shaped recovery that economists say broad-based rate cuts alone cannot fix. Goldman Sachs expects policymakers to accelerate existing fiscal measures rather than deploy aggressive monetary easing.

Some analysts still see room for action. Citi forecast a potential 10-basis-point rate cut as soon as July, alongside faster fiscal deployment. "We expect incremental policies to drive a mild rebound ahead," Citi said in a research note.

The PBOC has also taken steps to maintain orderly financial conditions. Earlier this week, regulators instructed some banks to avoid conducting bill re-discount operations below 0.5% after unusually low rates reflected excess liquidity and weak credit demand — a sign the central bank is managing the yield curve without cutting benchmark rates.

The last time the PBOC held the LPR unchanged for this long was during the post-pandemic recovery in 2022-2023, when rates eventually moved lower after growth undershot targets. With inflation remaining subdued and trade frictions with the US persisting, markets will watch for signals from the Politburo meeting on whether Beijing shifts toward more aggressive support.

This article is for informational purposes only and does not constitute investment advice.