China left key lending rates unchanged on Monday for the third straight month as the country seeks to maintain currency stability amid expectations of further monetary easing to support economic growth.
The People’s Bank of China (PBOC) maintained the one-year loan prime rate (LPR) at 3.1%, while the five-year mortgage reference rate remained at 3.6%.
The LPR is calculated monthly by the central bank, based on contributions from 20 commercial banks.
China’s economy showed stronger-than-expected growth in the final quarter of last year, bolstered by stimulus measures introduced since September. The performance enabled the economy to meet its annual growth target.
China’s economy met its annual growth target, expanding by 5% year-on-year in 2024. Its gross domestic product (GDP) reached 134.9084 trillion yuan (approximately 18.77 trillion U.S. dollars), according to data released by the National Bureau of Statistics on Friday.
However, analysts warn that underlying challenges, including weak consumer demand, a struggling property sector, and the potential for increased tariffs from the incoming U.S. administration, may dampen growth momentum.
PBOC Governor Pan Gongsheng suggested in September that a reduction in the reserve requirement ratio (RRR) could be implemented by the end of 2024 to enhance bank lending. Despite adopting a “moderately loose” monetary stance, such a cut has yet to materialize.
The central bank had earlier lowered short- and long-term lending rates in July and introduced a further 25-basis-point reduction in October.
China’s monetary policy in 2025
Investors are hoping for more substantial interest rate cuts this year. In December, China’s leadership signaled a shift toward a “moderately loose” monetary policy to bolster growth.
The Politburo announced earlier last month that China will implement an “appropriately loose” monetary policy in 2025, marking the first easing of its stance in 14 years.
However, this stance has driven government bond yields to historic lows, intensifying pressure on the yuan against the US dollar.
The yuan recently reached its lowest level in 16 months, prompting PBOC officials to reiterate their commitment to preventing exchange rate “overshooting.”
Measures to stabilize the currency have included issuing a record volume of central bank bills in Hong Kong and suspending certain government bond purchases.
Despite these interventions, analysts suggest the yuan may remain under pressure due to the country’s deflationary outlook.
Concerns are heightened by potential trade tensions, particularly as US President-elect Donald Trump’s administration, set to begin this week, may introduce higher tariffs on Chinese imports.
“Considerations around exchange rate stability may mean the PBOC must adopt a balanced approach,” wrote Erin Xin, Greater China economist at HSBC, in a recent note.
She anticipates the central bank will implement a 0.3 percentage point reduction in interest rates this year and lower the reserve requirement ratio by 0.5 percentage points. The reserve requirement ratio determines the proportion of deposits banks must hold in reserve.
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