BEIJING – China kept unchanged in October the new benchmark lending rate the country’s central bank announced in August with the aim of reducing borrowing costs for companies, state-run news agency Xinhua reported Monday.
The loan prime rate remained at 4.2 percent, the same as in September, the agency said.
The new rate is calculated from price contributions from a larger group of banks than the previous rate, including some smaller lenders which tend to have higher funding costs and greater exposure to bad loans.
The reform of the lending rate announced by the central bank in August aims “to better reflect market changes in its latest move to guide borrowing costs lower to support the real economy,” according to Xinhua; that is, support businesses affected by weak domestic demand and China’s ongoing trade dispute with the United States.
In a report sent to its subscribers, economic research consultancy Capital Economics said that keeping the LPR unchanged in October “will only increase pressure on the People’s Bank of China to ease funding costs for banks in the coming months.”
“A more impactful way for the PBOC to lower borrowing costs would be for it to cut the rate at which it lends to banks for shorter-term liquidity needs,” said the British firm’s economist Julian Evans-Pritchard, who added that the “the PBOC probably won’t be able to engineer large LPR cuts without a further reduction in interbank rates.”
The expert believes that monetary easing policies will be less potent than they were earlier in stimulating credit growth.
“Not only have credit spreads for riskier borrowers increased, but the crackdown on shadow banking is still ongoing. And as credit allocation has worsened – state-owned firms get the lion’s share of credit whereas loans are hard to come by for private ones – those hoping for a credit-driven rebound in economic growth will be disappointed,” he argued.
Despite the economic slowdown, the Asian giant’s central bank has been cautious when it comes to lowering interest rates due to fears of pushing up debt and the risk of a property bubble, experts say.