China kept its benchmark lending rates unchanged for a 17th consecutive month on Tuesday, a decision that underscores policymakers’ preference to focus on overhauling the interest-rate framework rather than deploying fresh broad-based stimulus after stronger-than-expected third-quarter growth.
The one-year loan prime rate (LPR), the reference for most new and outstanding corporate loans, remained at 3.00%, while the five-year LPR, a key anchor for mortgages, was held at 3.50%, the People’s Bank of China announced. The decision matched the forecasts of all 22 market participants surveyed by Reuters earlier this week.
The steady rates come as China’s economy expanded 4.5% year-on-year in the third quarter, accelerating from 4.3% in the previous quarter and beating expectations. That resilience has reduced the immediate pressure on Beijing to roll out additional monetary easing to hit its annual growth target of roughly 5%.
A Pivot Toward a New Policy Anchor
More significant than the rate hold itself is the central bank’s signal that it is preparing a fundamental shift in how it conducts monetary policy. In a speech at the Financial Street Forum in Beijing on Monday, PBOC Governor Pan Gongsheng said the central bank will study switching the tenor of its main open-market operations to overnight, which would effectively make the overnight reverse repurchase rate the primary policy rate.
Currently, the PBOC uses the seven-day reverse repo rate as its main policy signal. Pan noted that the overnight interbank repo rate (DR001) has in practice already become the central bank’s target for steering short-term liquidity, but the mismatch between the operational tenor and the policy benchmark has limited precision.
The shift, once implemented, would align China more closely with major central banks that use overnight rates as their primary policy tool. It also carries potential easing implications: the overnight reverse repo rate has recently stood at 1.25%, below the seven-day rate of 1.40%. Analysts at Huatai Securities have noted that anchoring policy to the lower overnight rate would, in effect, amount to a de facto rate cut by reducing banks’ funding costs.
Reforming How Loans Are Priced
Alongside the policy-rate shift, Pan outlined plans to diversify the benchmarks used for loan pricing, moving away from an almost exclusive reliance on the LPR. Under the proposed framework, financially strong corporations could negotiate with lenders to use either the overnight repo rate or the LPR as the benchmark for floating-rate loans. The LPR would continue to serve as the primary reference for small and micro enterprises and retail borrowers.
Huatai Securities described the tiered approach as a gradualist strategy designed to avoid disrupting the existing pricing system. The brokerage added that as more corporate loans become linked to the overnight repo rate, fluctuations in that rate are likely to narrow, which could enhance the stability of liquidity conditions.
The PBOC has already moved to operationalize the shift. It announced it would conduct daily overnight reverse repo operations from October 21 to November 2, with a cap of 1 trillion yuan per day, giving markets an early window into how the new rate might function in practice.
