In a move widely anticipated by economists, the People’s Bank of China (PBOC) kept its benchmark loan prime rates (LPR) unchanged on Monday, signaling a cautious approach to monetary policy as trade tensions with the U.S. escalate and pressure mounts on the Chinese yuan.
The 1-year LPR remains at 3.1%, while the 5-year LPR—commonly used for mortgage rates—stays at 3.6%. These rates have been stable since October 2024, as the central bank prioritizes exchange rate stability over aggressive monetary easing.
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Focus on Yuan Stability Amid U.S. Tariffs
The decision comes against the backdrop of intensifying trade tensions between the U.S. and China. Former U.S. President Donald Trump’s administration has reimposed tariffs of up to 245% on Chinese imports, with China responding by imposing up to 125% duties on American goods.
Amid this escalating tariff war, China appears focused on stabilizing the yuan rather than stimulating the economy through rate cuts. Following the rate announcement, the onshore yuan traded flat at 7.2995 per U.S. dollar, while the offshore yuan slightly strengthened to 7.2962.
Strong Q1 GDP Growth Provides Breathing Room
Supporting the PBOC’s wait-and-see approach is China’s better-than-expected economic performance in the first quarter. The country’s GDP grew 5.4% year-on-year, beating analyst forecasts and offering the central bank flexibility to hold rates steady.
Retail sales and industrial output for March also outperformed expectations, easing pressure on policymakers to deliver immediate stimulus.
Persistent Deflation a Concern for the Economy
Despite strong headline growth, inflation remains a concern. The Consumer Price Index (CPI) fell 0.1% year-on-year in March, indicating continued deflationary pressures. Meanwhile, the Producer Price Index (PPI) dropped 2.5%, marking the 29th consecutive month of deflation and the steepest decline since November 2024.
Low inflation typically provides central banks with room to cut rates. However, in China’s case, currency stability and external risks appear to outweigh deflationary concerns—for now.
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Analysts Expect No Change Until Fed Moves First
A recent Reuters poll showed 87% of economists expected the PBOC to keep the LPR unchanged this month. Analysts from Dutch bank ING echoed this sentiment, noting that the LPR is unlikely to shift unless the 7-day reverse repo rate is cut first. At 1.5%, the rate is unchanged following a 20 bps reduction in September 2024.
According to ING analysts, the PBOC could hold off on easing domestic monetary conditions until the U.S. Federal Reserve lowers rates.
For now, strong economic data has bought China time. But with external headwinds intensifying and deflation lingering, the pressure to act may return in the months ahead.
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