China leaves lending benchmark LPRs unchanged as expected

China LPR decision: China kept benchmark lending rates unchanged at the monthly fixing on Monday, matching market expectations, after the central bank surprised markets by keeping its medium-term policy rate steady last week.

Market watchers said renewed downside pressure on the yuan and narrowing net interest margins limited the scope for monetary easing from Beijing, even though recent data has underscored the country's uneven economic recovery and deflationary pressures have pushed up real borrowing costs.

The one-year loan prime rate (LPR) was kept at 3.45 per cent, and the five-year LPR was unchanged at 4.20 per cent. In a Reuters poll of 27 market watchers conducted last week, all but one participant predicted both LPRs would stay unchanged.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. The People's Bank of China (PBOC) left the medium-term lending facility (MLF) rate unchanged last week, defying market expectations for a cut. Market participants typically see changes in the MLF as a precursor to changes in the LPR.

"With hindsight, this likely reflected the fact that the PBOC's interest rates policy has been constrained by its exchange rate mandate," economists at Barclays said in a note. Downside pressure on China's yuan resurfaced in the new year, weighed down by a dollar buoyant on signs of resilience in the U.S. economy and caution that the Federal Reserve may take longer than some had expected to cut rates.

The onshore yuan has lost about 1.3 per cent for the year to date and has hit its weakest level in two months.