The Loan Prime Rate (LPR) has remained unchanged for 16 consecutive months, and a commentary published in a media outlet under the People's Bank of China stated that "there is little need to directly lower policy interest rates."

China's loan prime rate (LPR) remained unchanged in September, marking the 16th consecutive month of inactivity since June 2025. Against the backdrop of major central banks worldwide shifting towards tightening, the resilience of the domestic economy, pressure on bank net interest margins, and the unchanged policy interest rate anchor have combined to narrow the window for short-term rate cuts.

On September 20, the People's Bank of China authorized the National Interbank Funding Center to announce the latest Loan Prime Rate (LPR): 3.0% for the 1-year term and 3.5% for the 5-year term, both unchanged from the previous month. The Financial Times, a media outlet under the People's Bank of China, quoted analysts as saying that the actual interest rate on newly issued loans had already shown a marginal decline in August, and "there is little need to directly lower the policy rate."

Several economists interviewed believe that the Federal Reserve's 25 basis point rate hike in September, raising the target range for the federal funds rate to 3.75%-4.00%, will further exacerbate the inverted interest rate differential between China and the US, and the LPR is likely to remain unchanged in the short term.

However, analysts also emphasized that my country's monetary policy adheres to the principle of "taking our own needs as the main focus" and this has not changed. If the downward pressure on the domestic economy increases in the future, a reduction in the reserve requirement ratio may be implemented before an interest rate cut, at which time the Loan Prime Rate (LPR) will still have room to be lowered accordingly.

With the pricing basis unchanged, quoting banks lack the incentive to proactively lower prices.

The primary reason for the LPR remaining unchanged this time is the stability of the pricing anchor.

Wang Qing, chief macro analyst at Golden Credit Rating, pointed out in an interview with the Financial Times that since the LPR quote was announced last month, the central bank’s 7-day reverse repo rate has remained at 1.40%. “This means that the pricing basis for the September LPR quote is stable, which largely indicates that the LPR quote for that month will remain unchanged.”

From the perspective of the commercial banks' own operations, the quoting banks also lack the willingness to actively reduce the spread.

Data shows that since September, the average overnight money market rate DR001 has risen slightly compared to the previous month, and the yield to maturity of 1-year commercial bank (AAA-rated) interbank certificates of deposit has also increased slightly, resulting in a rise in wholesale funding costs.

In the second quarter, the net interest margin of commercial banks rose by 0.01 percentage points to 1.41% compared with the first quarter, marking the first increase since the first quarter of 2022, but it is still near a historical low.

Dong Ximiao, chief economist at Zhaolian, also stated that with commercial banks' net interest margin falling to a low of 1.41%, "quoting banks are not willing to actively reduce their markups from the perspective of maintaining sound operations and preventing risks."

The economy is resilient, and there is no strong urgency to lower policy interest rates.

The relatively stable economic fundamentals provide another layer of support for keeping the LPR unchanged. China's GDP is projected to grow by 4.7% year-on-year in the first half of 2026, within the full-year target range of 4.5% to 5.0%, and the effects of previously implemented policies are still under observation.

Wen Bin, chief economist at China Minsheng Bank, further cited high-frequency data to support this judgment. Exports in August maintained a year-on-year growth rate above 20% for the third consecutive month, and continued to accelerate compared to July; both CPI and PPI year-on-year growth rates rebounded in August; the year-on-year growth rate of industrial added value rose significantly, and the production and new orders sub-indices of the manufacturing PMI returned to above the expansion/contraction threshold.

Wen Bin also pointed out that in August, the interest rates for newly issued corporate and personal housing loans remained low. Coupled with a slight rebound in the year-on-year CPI and PPI, the actual interest rates of various loans showed a marginal decline. "The support for the real economy has been strengthened, and there is not much need to directly lower the policy interest rate."

He also mentioned that new policy-based financial instruments have been gradually implemented and disbursed in September, which will drive the accelerated issuance of policy bank bonds and the investment of supporting loans. The focus of monetary policy is more on maintaining ample liquidity and forming a synergistic effect through structural tools.

The Fed's interest rate hikes have strengthened external constraints, and the inverted interest rate differential between China and the US has intensified.

Changes in the external environment are another key variable currently constraining the decline of the LPR. The Federal Reserve raised interest rates by 25 basis points in September, and the European Central Bank and the Bank of Japan also raised their policy rates, indicating a collective shift towards tightening monetary policy among major central banks globally. Wang Qing pointed out that this has further widened the interest rate differential between China and the US, putting pressure on the RMB exchange rate and cross-border capital flows.

Dong Ximiao stated that the Fed's interest rate hikes "objectively reduced the room for my country's central bank to cut interest rates and lower the LPR, making a short-term decrease in the LPR even more likely."

However, analysts generally believe that the transmission effect of external tightening on domestic monetary policy should not be overestimated. Wang Qing emphasized that there are fundamental differences in domestic and international price trends. From January to August, China's cumulative CPI growth was only 0.9%, consistently below the target level of around 2.0%; while during the same period, the cumulative CPI growth in the United States and the Eurozone reached 3.3% and 2.7% respectively, remaining persistently high. "This largely determines the directional difference between current domestic and international monetary policies."

Wang Qing also pointed out that my country has established a two-pronged regulatory framework for cross-border capital flows, namely "macro-prudential supervision + micro-regulation." Large-scale cross-border capital flows caused by the misalignment of monetary policy cycles will be effectively controlled, and their impact on the RMB exchange rate "should not be overestimated."

Wen Bin of China Minsheng Bank also stated that the performance of my country's bond market and RMB exchange rate reflects the high safety profile of domestic assets, which helps monetary policy adhere to the principle of "focusing on our own needs".

Short-term stability is highly probable; a reserve requirement ratio (RRR) cut may precede an interest rate cut.

Despite the narrowing window for short-term interest rate cuts, analysts remain relatively optimistic about the scope for future policy adjustments.

Dong Ximiao believes that if the downward pressure on the domestic economy increases further, the central bank "may first release liquidity through a reserve requirement ratio cut, and then opportunistically lower the policy interest rate by 10 basis points. At that time, the LPR is expected to follow suit with an adjustment of about 5 basis points." He also emphasized that my country has a rich toolbox of monetary policy tools, and the moderately loose stance remains unchanged.

Wang Qing pointed out that the possibility of a new round of incremental policies cannot be ruled out. Specific paths include two: first, continuing to lower prices, increase the volume of structural monetary policy tools, and expand their scope to provide targeted support for technology financing and inclusive finance; second, implementing interest rate and reserve requirement ratio cuts, with an estimated interest rate cut of 10 basis points and a reserve requirement ratio cut of 0.5 percentage points, at which time the LPR (Loan Prime Rate) will follow suit.

Dong Ximiao concluded:

The Fed's interest rate hikes have strengthened external constraints, and the LPR is likely to remain unchanged in the short term; whether it will decline in the future depends on the domestic economic recovery, price trends, bank interest rate spreads, and changes in the external environment.

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