MNI PBOC WATCH: May LPR To Hold As Bank Interest Margins Fall
China’s Loan Prime Rate is expected to remain unchanged in May as the central bank remains cautious on further easing amid already low lending rates and continued pressure on banks’ net interest margins.
The one-year LPR is likely to hold at 3.0% and the five-year tenor at 3.5% when rates are set on Wednesday, marking a 12th consecutive month unchanged. Both rates were last cut by 10 basis points in May 2025 after the People's Bank of China lowered its seven-day reverse repo rate by 10bp to 1.4% on May 8 and followed with a 50bp reserve requirement ratio reduction on May 15, measures largely aimed at offsetting tariff-related shocks.
In its quarterly monetary policy report released last week, the PBOC removed references to reserve requirement ratio and interest rate cuts while adding language on “enhancing policy foresight, flexibility, and targeting,” suggesting the likelihood of near-term RRR or policy-rate reductions has diminished further as structural policy tools become the main focus.
With ample interbank liquidity continuing to suppress money-market rates, an RRR cut is viewed as largely unnecessary. Meanwhile, geopolitical tensions in the Middle East have raised risks of imported inflation through higher oil and commodity prices, reducing the urgency for policy-rate cuts unless a sharper economic slowdown or external shock emerges. (See MNI: PBOC To Reduce OMOs Further, Drain Bond Liquidity)
BANK MARGINS
A further constraint on easing is the continued decline in commercial banks’ profitability. According to the National Financial Regulatory Administration, commercial banks’ aggregate net interest margin narrowed 2bp from last Q4 to a record-low 1.4% in Q1. Net interest margins at large state-owned banks fell 1bp to 1.29%, while joint-stock banks, rural commercial banks and foreign banks posted margins of 1.54%, 1.58% and 1.30%, respectively, each down 2bp from the previous quarter.
The PBOC report showed the average interest rate on newly issued corporate loans fell 6bp from December to 3.05% in March, while rates on personal housing loans were unchanged at 3.06%, highlighting ongoing pressure on bank margins.
The central bank also stressed the need for stronger coordination between monetary and fiscal policy, signalling policymakers do not expect excessive liquidity strains from future government bond issuance. Instead, officials are expected to rely more heavily on targeted structural tools, including relending facilities combined with fiscal interest subsidies, as the primary channel for further policy support.
GEOPOLITICS
China-U.S. relations are expected to remain relatively stable following last week’s summit between Chinese President Xi Jinping and U.S. President Donald Trump. Chinese advisers told MNI Beijing is preparing for a potential trade agreement and new major purchases of U.S. goods at a leaders’ summit expected in Washington in September. (See: MNI: China Deal With U.S. Depends On Taiwan – China Advisors)
The PBOC warned in its report that Middle East tensions had pushed up crude oil and commodity prices and said policymakers must closely monitor “the impact of external imported inflation on the domestic economy.”
