Why China did not cut lending rates
What's the story
The People's Bank of China (PBOC) has decided to keep its benchmark lending rates unchanged for the fourth consecutive month. The decision comes even after the US Federal Reserve's interest rate cut last week by 25bps. China's one-year loan prime rate, which impacts most new and outstanding loans, remains at 3%. Meanwhile, the five-year benchmark rate, which influences mortgages, stays at 3.5%. China is prioritizing economic stability over short-term stimulus as it faces low inflation and deflationary pressures.
Policy stance
Last interest rate cut happened in May
The PBOC also kept the seven-day reverse repo rate, its main policy rate, unchanged after the Fed's cut. The benchmark lending rates are usually levied on banks' top clients and are calculated monthly based on designated commercial banks' proposed rates submitted to the PBOC. The last time these key lending rates were trimmed was in May when they were cut by 10 basis points as part of Beijing's efforts to bolster its economy.
Economic slowdown
China's economic slowdown worsens in August
China's economic slowdown worsened in August, with several key indicators falling short of expectations. Retail sales grew by just 3.4% in August amid weak consumption, while industrial output growth slowed to 5.2%, its lowest since August last year. In another sign of weak domestic demand, consumer prices fell more than expected last month and deflation in wholesale prices has persisted for nearly three years.
Trade impact
Export growth slowed to 4.4% in August
China's export growth also slowed to 4.4% in August, its weakest since February. This was due to the fading impact of frontloading shipments and US trade policy targeting transshipment to third countries. Barclays economists noted that "almost all housing indicators deteriorated further" in August, as the real estate slump worsened and fiscal stimulus faded.
Economic forecast
Economists expect marginal monetary easing later this year
Despite the current slowdown, economists expect Chinese policymakers to introduce marginal monetary easing later this year. This is to ensure the world's second-largest economy meets its annual growth target of around 5%. Barclays has projected China's real GDP will grow by 4.5% in 2025, despite a sharper-than-expected slowdown. The bank also predicts PBOC will cut the seven-day reverse repo rate and loan prime rate by 10 basis points in Q4.