China Effectively Holds Benchmark LPR Rate Steady for 14th Consecutive Month (Update)

[Asia Economy Reporter Kang Hee-jong] China has effectively kept its Loan Prime Rate (LPR), which serves as the benchmark interest rate, unchanged for 14 consecutive months.

On the 21st, the People's Bank of China announced the 1-year and 5-year LPRs at 3.85% and 4.65%, respectively, the same as the previous month. The LPR has remained at this level for 14 months since it was cut by 0.20 percentage points (for the 1-year term) in April last year, when COVID-19 was at its peak.

The LPR, announced by the People's Bank of China and used by all financial institutions in China as the benchmark for corporate and household loans, functions as a de facto benchmark interest rate. The LPR is calculated as the average of the best loan rates reported by 18 commercial banks in China, adding bank funding costs and risk premiums to the 1-year Medium-term Lending Facility (MLF) rate.

The June freeze of the LPR came amid growing inflationary pressures centered on raw material prices in China. According to the National Bureau of Statistics of China, the Producer Price Index (PPI) rose by 9.0% in May, the highest increase in 13 years since 2008.

Yi Gang (易綱), Governor of the People's Bank of China, recently emphasized at a forum held in Shanghai that although consumer prices are showing an upward trend, the inflation rate this year is expected to remain below 2%. He stressed that due to ongoing macroeconomic policy uncertainties, both inflationary and deflationary pressures must be carefully monitored.

With import prices surging mainly due to raw materials, the Chinese government is focusing on price management, nervously watching the potential negative impact on the domestic economic recovery. Recently, the government has released key raw materials from national reserves into the market to help control prices.