Tuesday, April 18, 2023, at the People’s Bank of China (PBOC) building in Beijing, China.
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The People’s Bank of China on Tuesday kept its benchmark lending rate unchanged as authorities strike a balance between supporting the slowing economy while maintaining currency stability.
Despite stagnant economic growth, the People’s Bank of China kept interest rates unchanged for 10 consecutive months, keeping the prime rates for one-year and five-year loans at 3% and 3.5%, respectively.
The one-year rate serves as the benchmark for most new and outstanding loans, while the five-year rate affects mortgages.
The world’s second-largest economy showed signs of slowing in the final quarter of last year, growing 4.5% year-on-year, the slowest pace since the country lifted strict coronavirus measures at the end of 2022.
Chinese authorities are struggling to pull the economy out of deep deflation as consumers cut back on spending amid a prolonged real estate slump, a tough job market and uncertain income prospects.
Retail sales growth fell to 0.9% in December, the lowest level in three years, while the GDP deflator, an indicator of price changes for goods and services, was negative for the 11th consecutive quarter.
Policymakers are looking to boost consumption of services to boost overall spending, betting that aged care services, leisure and tourism will offset weak demand for goods.
The Chinese yuan has continued to appreciate in recent months, with the offshore yuan rising from around 6.974 to the dollar at the start of the year to 6.889 on Tuesday morning, according to LSEG data.
The central bank has gradually shown some tolerance for its currency to appreciate in recent weeks, as a weaker dollar paves the way for wider yuan appreciation.
The People’s Bank of China manages the renminbi by keeping it within 2% on either side of the midpoint determined on each trading day. Authorities lowered the so-called fixed level, and in late January it fell below the standard of 7 for the first time in almost three years.
A stronger yuan could test the country’s export machine, already under pressure from U.S. tariffs, and could undermine the competitive advantage of exporters facing price pressure from other manufacturing rivals.
Economists at ING expect the range to fluctuate between 6.85 and 7.25 this year as the Chinese government moves to internationalize its currency. “The wild card will be whether monetary stability targets are eased in 2026,” the bank said.
