China Leaves Benchmark Lending Rates Unchanged, Defying Expectations

China unexpectedly kept its benchmark lending rates unchanged, shrugging off expectations for a cut following the U.S. Federal Reserve's larger-than-expected interest-rate reduction earlier this week.

Economic activity in China weakened across the board in August, strengthening the case for further easing to prevent the world's second-largest economy from slipping into a low-growth, deflationary scenario.

Still, the central bank seemed not to be swayed. The benchmark one-year loan prime rate remained at 3.35%, while the five-year rate held steady at 3.85%, the People's Bank of China said Friday.

"It came as a surprise to me, as I expected the PBOC to follow the Fed and cut the loan prime rate by 10 basis points," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Earlier this week, the Federal Reserve cut interest rates by half a percentage point, a larger-than-usual reduction many analysts believed could offer Beijing more policy flexibility. The Fed's move further eased pressure on the yuan, which has rebounded to its strongest level against the U.S. dollar since June last year, according to data from Wind, a financial-data provider.

"But the PBOC is not one to blindly follow the Fed--monetary conditions in China are much less correlated with the U.S. than many other countries," said Zichun Huang, China economist at Capital Economics.

A hold on benchmark lending rates Friday underscored that the PBOC remained constrained by concerns about bank profitability and declining long-term bond yields, Huang said.

Officials at China's central bank acknowledged earlier this month the limitations on further cuts to lending rates, citing a narrowing of banks' net interest margins--a key indicator of profitability--that reached a historic low of 1.54% at the end of June.

Instead, they hinted at a possible move to slash banks' reserve-requirement ratio to replenish liquidity into the nation's financial system.

China's economy, weighed by sluggish demand and a prolonged property downturn, has shown increasing signs of weakness in recent months. That has prompted several investment banks to lower their growth forecasts, with some warning that Beijing may fall short of its 2024 growth target of "around 5%."

Following Friday's decision to maintain benchmark rates, economists still expect a cut to occur within the year after the Fed adjusted its monetary stance.

However, in light of deflating consumer prices and weak demand, they argue that merely lowering interest rates won't be sufficient to revive the struggling economy. Instead, robust stimulus measures from the government's fiscal policy, particularly aimed at the ailing real-estate sector, are necessary.

Write to Singapore Editors at singaporeeditors@dowjones.com

(END) Dow Jones Newswires

September 20, 2024 00:07 ET (04:07 GMT)

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