China's benchmark lending rates stay put for 17th month; PBOC shifts focus

The decision to keep rates unchanged came as no surprise and is not expected to move markets significantly. Traders are now paying more attention to China's short-term rates for clues. Comments from PBOC Governor Pan Gongsheng on Monday regarding a shift to an overnight policy rate carry more weight for the outlook, given that the level of any new rate will influence expectations of further easing. Third-quarter growth has returned within Beijing's target range, and the Federal Reserve continues to tighten, making an imminent rate cut unlikely. This reduces pressure on the yuan from interest rate differentials. For the Australian and New Zealand dollars and oil, the lack of change in the LPR provides no new stimulus signal for Chinese demand, shifting focus to fiscal measures and upcoming data.

China left its one-year loan prime rate at 3.0% and the five-year rate at 3.5%, marking the 17th consecutive month without a change. The main policy rate is the seven-day reverse repo rate at 1.40%. Governor Pan has indicated a future move to an overnight rate, but the LPR remains the benchmark for most lending.

In 17 months, China's lending benchmarks have remained static. As the central bank now guides policy via short-term rates, the LPR functions more as a reference for loan pricing than as an active policy tool.

Key takeaways:

• On Tuesday, China held its one-year loan prime rate at 3.0% and its five-year rate at 3.5%, as anticipated.
• This is the 17th straight month with no change; the last adjustment was in May 2025.
• The PBOC has used its seven-day reverse repo rate (1.40%) as the main policy rate since 2024, with the LPR tracking it rather than serving as an independent tool.
• The LPR still functions as the key reference for most bank loans, with the five-year rate setting the benchmark for mortgages.
• On Monday, PBOC Governor Pan Gongsheng announced the central bank's study of a switch to an overnight policy rate, allowing major firms to price loans off that rate rather than the LPR.
• Third-quarter GDP growth of 4.5% came in above forecasts, reducing the urgency for additional easing.

On Tuesday, as widely expected, China kept its benchmark lending rates unchanged for the 17th month in a row. The one-year LPR stayed at 3.0% and the five-year LPR at 3.5%.

The decision reflects the diminishing role of the LPR in China's monetary policy. Following a 2024 framework change, the PBOC has employed its seven-day reverse repo rate, now at 1.40%, as the primary policy rate. This rate is directly set by the central bank to guide borrowing costs, and the LPR has merely tracked it. Without a change in the seven-day rate, the LPR had little cause to shift.

Despite this, the LPR retains a significant function. It is computed each month from quotes by a panel of 20 banks and acts as the reference rate for pricing the majority of new and existing loans in the economy. The one-year rate supports most corporate and household lending, while the five-year rate sets the standard for mortgages. For borrowers, the LPR remains the key figure that directly affects their payments, even if it no longer dictates policy direction.

That function is expected to shrink even more. At the Financial Street Forum in Beijing on Monday, PBOC Governor Pan Gongsheng stated that the central bank would study switching its main policy operations to an overnight tenor at the appropriate time, making the overnight reverse repo rate the main policy rate. He added that financially robust companies would be allowed to select either the overnight rate or the LPR as the benchmark for floating-rate loans, while loans to households and smaller enterprises would stay mostly linked to the LPR. The PBOC also intends to enhance the LPR quote-setting process.

Economic factors also favored holding rates. China’s economy grew 4.5% from a year earlier in the third quarter, slightly above forecasts and at the low end of the target range. Retail sales and industrial production also surpassed expectations. Overseas, Federal Reserve tightening has maintained a wide spread between US and Chinese bond yields, putting pressure on the yuan should China ease policy. A Reuters poll taken before the GDP data indicated economists anticipate the LPRs and reserve requirement ratio remaining unchanged until at least the first quarter of 2027.

The last cut to both LPRs was 10 basis points in May 2025. Market focus now turns to when the overnight rate switch will occur and what level the new policy rate will be set at, providing a stronger signal of the PBOC's future direction than the monthly LPR announcement.