China’s central bank decided to keep key lending rates unchanged on Thursday, holding firm as the country deals with a weakened yuan, new US trade tariffs, and an economy that is still trying to stabilize.
The People’s Bank of China (PBOC) left the 1-year loan prime rate (LPR) at 3.1% and the 5-year LPR at 3.6%, the same levels they have been at since the quarter-point cut in October.
This decision follows the US Federal Reserve’s move to keep its benchmark rates unchanged, though the Fed has signaled that rate cuts totaling half a percentage point are expected through 2025. Meanwhile, China is trying to hold off on easing too soon as the yuan faces downward pressure from global financial uncertainty and higher US tariffs.
PBOC keeps rates unchanged as trade war escalates
The People’s Bank of China calculates its LPR rates based on monthly submissions from designated commercial lenders. The 1-year LPR is used to price most business and household loans, while the 5-year LPR serves as a benchmark for mortgages.
At the same time, the PBOC’s 7-day reverse repo rate has remained at 1.5% since October, showing the central bank’s effort to keep liquidity stable while avoiding further drops in the yuan’s value.
The yuan has already weakened nearly 1.8% since Donald Trump won re-election in November. The offshore yuan, which hit a 16-month low in January, has seen a slight recovery but remains fragile as new tariffs threaten China’s export sector.
Following the PBOC’s rate announcement, the yuan remained relatively unchanged at 7.2280 per dollar, while Chinese 10-year government bond yields dropped over 2 basis points to 1.932%.
“Policymakers recognize the country’s robust growth momentum while remaining cautious due to persistent pressures ahead,” said Bruce Pang, an adjunct associate professor at the Chinese University of Hong Kong. He pointed to risks from trade tensions, Federal Reserve policies, and already-thin margins at Chinese banks.
Inflation weakness fuels speculation of future rate cuts
China’s economy has shown some improvement in early 2024. Retail sales grew 4.0% year-over-year in January and February, rising from the 3.7% increase in December. Industrial production also came in stronger than expected, expanding 5.9% from a year earlier.
However, inflation data suggests that growth may still need policy support. In February, consumer price inflation fell into negative territory, marking the first decline in over a year. Producer prices also remained in deflation, raising concerns that demand is weakening despite Beijing’s push to stimulate domestic consumption.
“With the stronger call to support consumption, there is a growing chance that China will cut rates in the next meeting or so,” said Gary Ng, a senior economist at Natixis. “If retail and home sales do not improve, especially if inflation stays weak, we may see a rate cut as early as April.”
Trump’s latest tariffs are adding pressure to China’s already uncertain economic outlook. The US President imposed a 20% tariff on Chinese imports and has threatened more in early April. This has raised concerns about China’s export sector, one of the few bright spots in its economy. In January and February, exports slowed more than expected, while imports saw their sharpest decline since mid-2023.
Beijing weighs policy response as global pressure builds
China’s top officials have signaled that more monetary easing could be on the way this year, with interest rate cuts at an appropriate time. Beijing has set a 5% growth target, but achieving that may require additional stimulus.
Goldman Sachs expects two 20-basis-point cuts to the LPR in the second and fourth quarters of 2024. The bank also predicts two 50-basis-point reductions in the reserve requirement ratio (RRR), which determines how much cash banks must hold in reserves.
PBOC Governor Pan Gongsheng has stressed that the central bank wants to keep the yuan stable, saying it must stay at a “reasonable and balanced level”. Preventing the currency from weakening too fast could also be part of China’s strategy ahead of potential trade negotiations with Trump to prevent further tariff hikes.
Despite stronger stock market performance in China, investors remain cautious. The MSCI China index has gained 19% in 2025, marking its best start to a year ever, according to Goldman Sachs. But regulatory worries and concerns about the health of the Chinese economy still weigh heavily on market sentiment.
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