MNI PBOC WATCH: LPR To Hold Despite Looming Headwinds

China's Loan Prime Rate is likely to remain unchanged in August as the People’s Bank of China continues to emphasise targeted facilities to support weak sectors in a bid to counter economic headwinds and deflation risks.

Authorities will hold the LPR at 3.0% for the one-year maturity and 3.5% for the five-year tenor on Wednesday. Both were cut by 10 basis points in May after the Bank lowered the 7-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction to the reserve requirement ratio (RRR) on May 15. (See MNI PBOC WATCH: LPR, RRR Cuts Seen Later In 2025; Held For Now)

In its latest Monetary Policy Report on Aug 15, the central bank stressed the need to implement accommodative policy “in a detailed manner” with a focus on financing for small and micro enterprises, technological innovation, and consumption, signaling it will continue to guide lenders to increase credit supply through expanded relending tools.

Last week, the Bank, together with fiscal authorities, introduced interest subsidies on personal consumption loans and loans to service businesses, underlining its support for demand. 

The measures followed signs of mounting economic headwinds in July. National Bureau of Statistics data showed broad declines across production, consumption, and investment, with only exports recording gains. Concerns intensified as yuan loan growth slowed further, with new lending turning negative for the first time since July 2005.

LOOSER POLICY EYED

Policy advisors told MNI growth pressure is expected to rise in H2, with GDP projected at 5% in Q3 and 4.6% in Q4. (See MNI: China's GDP Faces H2 Growth Challenges)

Xiao Geng, associate dean of the School of Public Policy at the Chinese University of Hong Kong, Shenzhen, urged further monetary easing to lower debt issuance costs and ensure liquidity, noting authorities would primarily use fiscal policy to stabilise prices and shore up the economy. The immediate priority should be to lift inflation toward 3%, Xiao said, adding that macroeconomic and financial policies remained overly cautious before last September, marked by a weak yuan, limited stimulus, and subdued capital market returns.

His concern echoed the PBOC’s report last Friday, which reiterated the importance of “stabilising prices” and stressed that “a reasonable rebound in prices” should be a key consideration for monetary policy.

China’s consumer price index registered 0.0% y/y in July, down 0.1 pp from June, while the producer price index fell 3.6%.

Yuan Haixia, director of China Chengxin International Credit Rating’s Research Institute, predicted at least one further RRR and policy-rate cut this year, along with more targeted support for trade, innovation, housing, and employment, with authorities likely to introduce an additional CNY1 trillion in fiscal funding.