China has decided to keep its benchmark interest rates at the lowest levels in two decades for the sixth consecutive month. The country's one-year loan prime rate remains at 3.65 percent, while the five-year rate is at 4.30 percent.
The one-year LPR is typically used as guidance for new and outstanding loans in China. Meanwhile, the five-year LPR influences mortgage rates. The Chinese central bank cut both rates last August to support the economy.
The People's Bank of China (PBC) decides on the LPR based on data submitted by 18 designated commercial banks. In turn, private banks use the rates to offer loans to their customers.
Analysts said China decided not to increase its interest rates partially because its macroeconomic situation had only shown slight improvement after lifting the strict pandemic policy at the beginning of January.
The easing of the health policy caused a spike in COVID-19 cases, which disrupted business activities in several cities. Despite that, the Chinese government announced a "decisive victory" over the disease due to the low mortality rate in the most recent outbreak.
Another reason the PBC kept benchmark rates low was concerns over its national currency. The onshore and offshore yuan nearly traded over the key rate of 7 yuan per dollar. The yuan fell to its lowest rate since the financial crisis in 2008 since the PBC cut the benchmark rates in August.
However, the yuan is under pressure from further interest rate hikes by the U.S. Federal Reserve. Analysts said persistent inflation and a strong labor market in the U.S. would motivate the Fed to maintain its hawkish monetary policy, widening the gap between Chinese and U.S. interest rates.
Previously, economists and investors had already predicted the lack of change in the PBC's policy rate. British bank Barclays said the PBC would maintain an "accommodative" policy rate within the first half of 2023, but only via "liquidity-related actions" instead of rate cuts.
For example, last week, the PBC increased medium-term liquidity injections by extending maturing policy loans. The market uses a medium-term lending facility (MLF) as a guide to the LPR, which is seen as a precursor to any changes in the central bank's policy rate.
Analysts at Barclays explained that the PBC could maintain its lax policy because economic activities in China are still weak, meaning that the central bank has enough room to stay accommodative, unlike the U.S. and Europe.
New bank loans in China rose to a total of 4.9 trillion yuan last month, higher than anticipated. According to analysts, the rising loans showed strengthening financing needs, which also signaled impending economic recovery.
The Xi Jinping administration has also pledged to support China's failing real estate sector, which represents a quarter of the domestic economy. Over the past year, prices for new houses in China have historically declined.
Reports said that sales of the top 100 Chinese developers were 60 percent less than in 2021 last year. It even prompted Chinese banks to offer mortgages to senior citizens over 70.
Other important economic events in Asia-Pacific
Like China, the Bank of Korea is expected to keep its policy rate on Thursday, which is now at 3.5 percent. It will be the first time for the South Korean central bank to put its benchmark rates on hold after consecutive rate hikes since April 2022.
Despite that, analysts warn that the BOK's guidance can be more hawkish than January because inflation in the country remains "sticky." Furthermore, the South Korean won has declined by seven percent in the last two weeks.
Meanwhile, the Reserve Bank of New Zealand is projected to reduce its hike size on Wednesday, raising the benchmark interest rates by 50 basis points to 4.75 percent. The bank will then increase the interest rates by another 50 basis points to reach a peak rate of 5.25 percent by mid-year.
The Japanese government is due to report its consumer price index for January on Friday. Analysts estimate the annual inflation rate in Japan to hit over four percent. On the same day, Hong Kong and Taiwan will publish their final GDP readings for Q4 2022.
