(Yicai) Dec. 22 -- China’s central bank kept both the one-year and over-five-year loan prime rates unchanged this month for the seventh consecutive month. The benchmark lending rates, which are already at a historic low, could fall further next year, a researcher said.

The one-year LPR, a key reference for consumer and corporate loans, was held at 3 percent, and the over-five-year LPR, which guides mortgage rates, remained at 3.5 percent, the People’s Bank of China said today. 

The two main factors that kept the LPRs flat this month are the fact that policy interest rates remain steady and that banks’ net interest margin, which is the difference between the interest a bank earns on its loans and investments and the interest it pays on deposits and other funding, continue to be squeezed.

If deposit rates and policy rates continue to fall in 2026, the LPR could stay mostly stable next year with a slight decrease, with more emphasis placed on targeted monetary policy tools, said Dong Ximiao, chief researcher of CMB-China Unicom Consumption Finance. There is still room for cuts to banks’ reserve requirement ratios cut and interest rates, though an RRR cut is more likely than a rate cut. 

The fact that the PBOC kept the seven-day reverse repo rate unchanged means that the pricing basis for December’s LPR did not shift, signalling in advance that the LPR would remain unchanged for the month, said Wang Qing, chief macro analyst at Golden Credit Rating International. At the same time, with commercial banks’ net interest margins at record lows, LPR-quoting banks have little incentive to proactively lower the LPR.

The last time the PBOC adjusted the LPR was in May, when rates were cut by 10 basis points in line with a reduction in the reverse repo rate. Since then, the interest rate policy has remained stable.

“Economic growth momentum weakened in the second half, but there is no doubt that China will meet its full-year growth target of around 5 percent this year,” Wang said. “There is little urgency to step up counter-cyclical adjustments before the end of the year, and monetary policy is maintaining a steady stance.”

The reality is that both financial and economic data are weak, said Ming Ming, chief economist of CITIC Securities. However, realistically speaking, although the Chinese yuan exchange rate is resilient and there is an ongoing interest rate cut cycle overseas, banks' net interest margins are still under huge pressure, so in the future, interest rate cut tools may be used more flexibly, depending on how lending recovers in the first quarter next year. Overall, the generally loose monetary policy environment remains unchanged.

Editor: Kim Taylor