China Leaves Interest Rates Unchanged Amid Yuan Weakening and Trade Policy Uncertainty
The People’s Bank of China (PBOC) has kept its benchmark lending rates unchanged, holding the 1-year loan prime rate at 3.1% and the 5-year LPR at 3.6%. This decision comes amid a weakening yuan and uncertainty surrounding the incoming Trump administration’s trade policies.
PBOC officials are prioritizing exchange rate stability over potential interest rate cuts, according to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. This decision was influenced by the seeming good growth number and a strong greenback, which have prevented China from cutting rates, according to Gary Ng, senior economist at Natixis.
Despite the lack of rate cuts, China’s economy has shown signs of improvement, with accelerated activity in the final quarter of last year. However, underlying growth drivers may be temporary, with weak consumer demand, a deepening property market slump, and looming tariff hikes from the incoming Trump administration posing challenges.
PBOC Governor Pan Gongsheng had hinted at the possibility of cutting the reserve requirement ratio by the end of 2024, depending on market liquidity conditions. However, the bank has yet to make any changes to this policy.
Markets are waiting with bated breath for trade policy announcements from the Trump administration, which will likely influence any future policy moves by the PBOC. As Helen Qiao, chief Greater China economist and head of Asia economics at BofA Global Research, noted, any surprise increase in tariffs would warrant more immediate policy responses.
Mainland China’s benchmark CSI 300 index jumped 1.08% following the rate decision, while the offshore yuan strengthened 0.20% to 7.3244 per US dollar. The onshore yuan traded at 7.3157 per dollar.
