China Freezes LPR for Three Consecutive Months... Adjusting Pace of Monetary Easing (Comprehensive)

China's central bank, the People's Bank of China, has kept the Loan Prime Rate (LPR), the de facto benchmark interest rate, unchanged for three consecutive months.

On the 20th, the People's Bank of China announced in a statement that it would hold the 1-year LPR at 3.45% and the 5-year LPR at 4.20%.

[Image source=Yonhap News]

The LPR is calculated by aggregating the lending rates offered to the best customers by 18 designated banks. Local financial institutions use this as a benchmark for lending, making it a practical benchmark interest rate. The 1-year rate affects general loans, while the 5-year rate influences mortgage loans. Until early 2020, the 1-year LPR was maintained in the 4% range, but the People's Bank of China began cutting rates starting in April 2020 as the COVID-19 pandemic intensified.

In June, both the 1-year and 5-year LPR were lowered by 0.1 percentage points simultaneously, followed by an additional 0.1 percentage point cut to the 1-year LPR in August. Since then, the rates have remained steady.

This LPR freeze was expected after the People's Bank of China also held steady the 1-year Medium-term Lending Facility (MLF) rate, which is the policy rate. Typically, in China, when the MLF is adjusted, the LPR moves accordingly.

To stimulate the economy, the People's Bank of China injected liquidity of 1.45 trillion yuan through open market operations via MLF loans. MLF loans maturing this month amount to 850 billion yuan, resulting in a net inflow of 600 billion yuan. Additionally, 495 billion yuan was supplied to the market through 7-day reverse repurchase agreements (reverse repos).