China goes against the grain and refuses to follow the Federal Reserve’s lead

China, LIVE – China’s central bank has officially kept its interest rate on hold. The move is in sharp contrast to the Federal Reserve’s aggressive move to cut interest rates by 50 basis points (bp).

The People’s Bank of China’s (PBOC) decision to keep interest rates unchanged has shaken the market, as observers predict that China will follow the lead of the US central bank.

The reason Chinese economists should cut interest rates is because the Federal Reserve has cut 50 basis points, which leaves plenty of room for China. Especially the cost of debt without the risk of a sharp depreciation of the yuan.

Citing CNBC on Friday (20/9/2024), the People’s Bank of China said it would keep its one-year lending rate (LPR) at 3.35 percent. Meanwhile, the five-year interest rate is 3.85 percent.

One-year interest rates affect corporate lending and most household lending in China. Meanwhile, the five-year rate acts as a benchmark for mortgage interest rates.

Lower interest rates in the country allow for greater monetary flexibility for China. It is therefore prioritizing easing the debt burden of consumers and businesses, while trying to boost investment and spending.

Earlier, China also caused a stir in the market in July by cutting interest rates on short- and long-term loans. The move was taken to restore economic growth amid a prolonged property crisis and weakening consumer and business confidence.

China’s retail sales, industrial output and urban investment all grew more slowly than market expectations in August and missed economic expectations. Urban unemployment hit its highest level in six months. Meanwhile, house prices fell year-on-year at the fastest pace in nine years.

Disappointing economic data indicates the country’s lack of economic interest. Not only this, it is alarming that the government is taking further measures by offering fiscal and monetary incentives.

Several major banks cut their forecasts for China’s full-year GDP growth to 5 percent below the government’s official target. Bank of America cut its forecast for China’s GDP growth to 4.8 percent in 2024, and Citigroup cut its expectations to 4.7 percent.