CHINESE banks maintained their benchmark lending rates, after the central bank refrained from reducing their borrowing costs on one of its key policy loans.

The one-year loan prime rate (LPR) was held steady at 3.45 per cent, while the five-year rate – a reference for mortgages – was left unchanged at 4.2 per cent, according to data from the People’s Bank of China (PBOC) on Friday (Oct 20). Most economists polled by Bloomberg had forecast no change for either rate.

The loan rates are based on the PBOC’s rate on the medium-term lending facility (MLF), which was held at 2.5 per cent earlier this week. The economy gained momentum last quarter, while China’s widest yield gap with the US since 2002 is limiting the PBOC’s scope to reduce rates further to avoid adding downward pressure on the yuan.

The central bank is also concerned about the squeeze on the profit margin of commercial lenders, which have come under pressure due to much of this year’s policy stimulus. To shore up the economy, Chinese banks have been ordered by the government to provide cheap loans to targeted sectors, cut costs of more mortgages and extend local government debt at lower interest rates, among other measures.

Chinese banks have been lowering the rates they offer to depositors to protect their profitability as they reduce lending rates. Major lenders already applied three coordinated cuts in the past year.

The country’s property crisis has remained an overhang for the economy. The PBOC has indicated that more monetary easing is still on the cards if necessary. Its head of monetary policy recently reassured investors that Beijing still has room to deal with “unexpected challenges and changes”.

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Economists expect authorities to further cut interest rates and the reserve requirement ratio for banks this year.

The LPRs are based on the interest rates that 18 banks offer their best customers, and are published by the PBOC monthly. They are quoted as a spread over the MLF rate. BLOOMBERG