As the year 2025 kicks off, China's central bank, the People's Bank of China (PBOC), has officially announced the loan prime rates (LPR) for JanuaryOn January 20, the PBOC revealed that the one-year LPR would remain at 3.1%, while the five-year LPR would hold steady at 3.6%. This stability in interest rates comes as no surprise to industry experts, as it aligns with the prevailing market expectationsIn a concurrent move to bolster liquidity within the banking sector, the PBOC conducted a reverse repurchase operation, injecting 123 billion yuan into the market at a fixed rate of 1.5% for a duration of seven days, mirroring previous measures.

The decision to leave the January LPR unchanged can largely be attributed to recent economic trends indicating an upward movementThe advent of a comprehensive package of incremental policies has seemingly paid off, with noticeable improvements in the economy’s vitality

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Notably, the gross domestic product (GDP) witnessed a significant year-on-year increase of 5.4% in the fourth quarter of 2024, representing an acceleration of 0.8 percentage points compared to the previous quarterThis economic resurgence has dampened the immediate necessity for a rate cut, according to financial analysts.

Wang Qing, Chief Analyst at Dongfang Jincheng, emphasizes that the stability of the policy rate at the beginning of the year was a prominent indicator of the LPR's trajectoryWith the PBOC's seven-day reverse repurchase rate remaining unchanged, it strongly suggested that the January LPR would reflect similar steadinessFurthermore, recent statistics indicate that the net interest margin for commercial banks fell to a historical low of 1.53% in the third quarter of 2024, remaining below the critical threshold of 1.8%. Coupled with the rising yields on interbank certificates of deposit, this development has reduced the motivation for banks to lower the LPR.

Meanwhile, Wen Bin, Chief Economist at China Minsheng Bank, concurs that the prospect of rate cuts is constrained in the short term

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He points out that increasing pressures to stabilize the foreign exchange rate and the consistent policy interest rates provide a stable foundation for LPR pricingRecent observations of tight funding conditions and a rapid rise in funding rates pose additional challenges, leading to an upward trend in the cost of bank liabilities, thereby limiting the banks' capacity to reduce LPR spreadsHistorically, in the lead-up to the Lunar New Year, the central bank often injects a large volume of funds into the market to stabilize liquidityNonetheless, the potential for further tightening in fund availability remains limited in the future.

Despite the current yield stability, analysts are optimistic about future monetary policiesThey note that amid low inflation levels, uncertainties in the external trade environment, and ongoing stabilization efforts in the real estate market, a continuation of aggressive monetary easing is anticipated in 2025. Experts expect that the central bank will likely implement meaningful interest rate cuts, which would subsequently influence the LPR downward.

The Central Economic Work Conference held in December 2024 set the stage for 2025 by emphasizing the need for timely cuts in reserve requirements and interest rates

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Additionally, a statement released on January 3, 2025, discussed the necessity for the PBOC to adjust policy based on domestic and international economic conditions, along with market operations when appropriate.

This notion of “timely” and “opportune” signifies that the PBOC aims to utilize counter-cyclical adjustments strategically, selecting specific moments to implement reserve requirement and interest rate cuts effectivelyAnalysts forecast that interest rates could lower significantly in the first half of 2025, potentially exceeding a cumulative reduction of 50 basis points over the year—surpassing the prior year's reductions of 30 basis pointsSuch moves are expected to lead to substantial downward adjustments in the LPRFurthermore, structural policy measures aimed at supporting agriculture, small businesses, technological innovation, and affordable housing will also see a reduction in associated interest rates, ultimately benefiting financing costs for businesses and households.

Wang Qing speculates that there may be targeted and substantial reductions in the five-year LPR to encourage lower mortgage rates for households

In contrast, Wen Bin expresses concerns regarding the application of broad monetary policy tools like reserve requirement and interest rate cuts, highlighting their potential constraints due to maintaining exchange rate stability and managing interest rate spreadsHe suggests that in the short term, the probability of rate cuts remains low, emphasizing the need for careful monitoring of the new U.Spresidential administration's policy towards China and China's corresponding responses.

In the context of better-than-expected economic conditions in China, the driving forces behind future monetary easing may increasingly hinge on developments regarding tariff policies imposed by the United StatesIf the incoming U.Spresident's tariff actions align with or fall short of expectations, the timeline for monetary easing may be postponedConversely, if tariff measures exceed anticipations, the likelihood of an acceleration in monetary policy relaxation would rise, leading to further adjustments in the LPR

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