China Holds Rates Steady for Tenth Month Despite Economic Slowdown

Monetary Policy Balancing Act

China's central bank kept its benchmark lending rates unchanged for the tenth consecutive month, holding the 1-year loan prime rate at 3% and the 5-year rate at 3.5% . The People's Bank of China is navigating a delicate balancing act of supporting a slowing economy while maintaining currency stability .

The 1-year rate serves as the benchmark for most new and outstanding loans, while the 5-year level influences mortgages . Analysts suggest that the central bank is opting for administrative guidance and liquidity tools rather than outright rate cuts to avoid further pressure on bank margins and the yuan .

Deputy Governor Zou Lan told reporters last week that there was "still room" to reduce both the reserve requirement ratio and policy rates this year . However, policymakers appear reluctant to implement broad monetary easing at this time.

Economic Headwinds Mount

The world's second-largest economy showed signs of slowing down in the final quarter of last year, expanding 4.5% year on year, its slowest pace since the country lifted its stringent Covid curbs in late 2022 . Chinese authorities have struggled to lift the economy out of an entrenched deflation as consumers cut back spending amid a prolonged real estate downturn, a bleak job market and uncertain income prospects .

"Beijing has become increasingly concerned about one of the worst domestic demand slowdowns in this century," a team of economists at Nomura said in a note Monday . Fixed-asset investment in urban areas declined 3.8% last year, the first annual decline in decades, while new bank loans shrank to a 7-year low of 16.27 trillion yuan ($2.33 trillion) in 2025 .

Currency Considerations

The PBOC in recent weeks has signaled some tolerance for a gradual strengthening in its currency, with the dollar's weakness paving the way for the yuan to extend its advance . The officials have moved its so-called fixing level lower, dipping below the 7-benchmark for the first time in nearly three years in late January .

This currency appreciation presents both opportunities and challenges. A strengthening yuan could test the country's export machine already under pressure due to U.S. tariffs, eroding a competitive advantage for exporters who face price pressure from other manufacturing rivals . While a firmer yuan helps contain imported inflation and capital outflow risks, it also poses challenges for exporters already grappling with U.S. tariffs and intense global competition. A stronger currency could erode price competitiveness at a sensitive juncture for China's export engine .

Looking Ahead

Last week, the central bank lowered the interest rates on its structural monetary policy tools by 0.25 percentage point, reducing the 1-year rate on relending facilities for agricultural and small businesses to 1.25%. Rather than cutting policy rates directly, it reduced the interest charged on central bank's funding to financial institutions .

Economists at ING forecast a fluctuation band of 6.85 to 7.25 this year as Beijing seeks to advance the internationalization of its currency . The steady hand on interest rates suggests policymakers are prioritising financial and currency stability over aggressive monetary easing, even as growth pressures linger . China's approach reflects the complex challenge of supporting domestic growth while managing external pressures and currency dynamics in an increasingly uncertain global environment.