MNI PBOC WATCH: Jan LPR To Hold On Structural Rates Cut

China’s Loan Prime Rate is likely to remain unchanged in January after the central bank opted to cut interest rates on its structural facilities for key sectors, cooling expectations for any near-term, across-the-board policy easing.

The one-year LPR is expected to be held at 3.0% and the five-year tenor at 3.5% on Tuesday. Both rates were last lowered by 10 basis points in May 2025 after the People’s Bank of China cut the seven-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15, largely aimed at countering tariff-related shocks. (See MNI PBOC WATCH: Dec LPR To Hold, OMO Readied For Rising Demand)

PBOC Vice Governor Zou Lan last week announced a 25bp cut in interest rates on structural relending tools and an expansion in quotas for facilities supporting small businesses and science and technology innovation, aimed at encouraging banks to boost credit supply to key sectors. While the move is expected to support lending, it likely reduces the probability of a policy rate cut in the first quarter.

UNLIKELY EASING

Huang Yiping, a member of the PBOC’s Monetary Policy Committee, told MNI the Bank is unlikely to embark on significant policy easing this year, citing the limited effectiveness of monetary tools in addressing persistent oversupply. Compared with aggressive monetary easing, structural and reform-oriented measures would be more effective, Huang said. (See MNI INTERVIEW: Big PBOC Easing Unlikely Despite Price Focus)

Although China met its 5% growth target last year, fourth-quarter GDP growth slowed to 4.5%, the weakest pace of the year, raising concerns about a quarter-by-quarter deceleration. The continued decline in the GDP deflator points to weaker real growth, weighing on household incomes, corporate profits and investor returns, and warrants high-level policy attention, Huang said.

Zou stressed at the press conference that there remains room for further RRR and interest rate cuts, downplaying constraints from lenders’ narrowed interest margins, and said the Bank would adjust policy in line with economic performance and external conditions.

He also said the yuan exchange rate does not pose a strong constraint on rate cuts, noting that the currency remains stable and the U.S. dollar has entered a rate-cutting cycle.

YUAN FOCUS

Guan Tao, global chief economist at BOC International, said authorities’ exchange-rate policy objective for 2026 will remain preventing either excessive appreciation or depreciation, providing a stable monetary environment for the economy and limiting the scope for further significant one-way gains in the currency.  

Yuan appreciation should not be used as a policy tool to correct external imbalances while the economy remains sluggish, Guan said, as this would exacerbate domestic supply-demand mismatches and add downward pressure to already low inflation.

However, Huang called for greater yuan flexibility, giving market forces a larger role as Beijing continues to promote the international use of its currency.