China keeps benchmark lending rates unchanged despite slowing economic growth

China’s central bank kept its loan prime rates unchanged on Tuesday as the authorities focus on targeted support for specific sectors to bolster a slowing economy instead of broad policy easing.

The People’s Bank of China held its 1-year and 5-year loan prime rates at 3% and 3.5%, respectively, keeping them unchanged for an eighth straight month.

The 1-year rate influences most new and outstanding loans, while the 5-year benchmark affects mortgages.

The decision came as the world’s second largest economy lost its momentum in the final quarter of 2025, growing 4.5% year on year, the slowest pace since the reopening from stringent Covid curbs in late 2022.

The nominal GDP, a barometer to gauge corporate profitability and household salaries, has remained below 4% for the third consecutive year, coming in at 3.8% in the fourth quarter, according to economists at Barclays. That marked the lowest level in 50 years, excluding 2020 when the economy was upended by the pandemic outbreak.

The GDP deflator — a metric that highlights changes in the prices of goods and services — has stayed negative for the 11th quarter, the bank said, expecting the deflation to persist throughout this year.

Retail sales growth fell to a 3-year low of 0.9% in December, as household confidence continued to be battered by a years-long housing slump, a bleak job market and entrenched deflation.

In a press conference Tuesday, China’s state planner said policymakers will continue to implement “more proactive fiscal policies” and “moderately loose monetary policy” with the goal of supporting a recovery in prices.

“Beijing has become increasingly concerned about one of the worst domestic demand slowdowns in this century,” a team of economists at Nomura said in a note Monday.

Last week, the central bank lowered the interest rates on its structural monetary policy tools by 0.25 percentage point, reducing the 1-year rate on relending facilities for agricultural and small businesses to 1.25%, effective Monday.

Rather than cutting policy rates directly, it reduced the interest charged on central bank’s funding to financial institutions, reducing banks’ borrowing costs and encouraging them to extend credit to targeted sectors at more favorable rates.

The PBOC also plans to set up a dedicated relending program for private firms and increase quotas for tech innovation loans, support for small and medium-sized private companies. In addition, the minimum down-payment ratio for commercial property mortgages will be lowered to 30% to help reduce inventory in the real estate market.

New bank loans shrank to a 7-year low of 16.27 trillion yuan ($2.33 trillion) in 2025, according to official data compiled by financial service provider Wind Information, underscoring sluggish borrowing demand and piling pressure on the government to provide more stimulus.

Deputy Governor Zou Lan told reporters last week that was “still room” to reduce both the reserve requirement ratio and policy rates this year, while acknowledging that conditions have improved for further monetary easing.

Banks’ net interest margins, or NIMs, have showed signs of stabilizing, Zou said, after years of contraction weighed on lenders’ profitability. The NIM has remained at 1.42% for a second straight quarter through September, but was 11 basis points lower compared to a year earlier.

The yuan’s recent appreciation has also helped create space for policy rate cuts, Zou noted. Chinese offshore yuan has gained over 1% against the dollar in the past month, breaching the key threshold of 7 per dollar last month for the first time since May 2023.

The offshore yuan was little changed on Monday, trading at 6.9571 against the greenback, according to LSEG, while the onshore yuan was 6.9612 per dollar. China’s 10-year government bond yield dipped modestly to 1.834%.

Policymakers have attributed the recent appreciation in yuan to a weakening dollar and easing geopolitical tensions between the U.S. and China, rather than a shift in monetary policy. The PBOC remains committed to prevent “overshooting” and keeping the yuan in a “reasonable and balanced equilibrium,” Zou said.

Economists at Goldman Sachs expected the PBOC to cut the reserve requirement ratio by 50 basis points and the policy rate by 10 basis points in the first quarter.

China’s manufacturing and exports have held up well as businesses navigated growing trade barriers around the world, with industrial production rising 5.9% for the entire year of 2025 and exports climbing 5.5%, taking its trade surplus to record of early $1.2 trillion.

Fixed-asset investment in urban areas declined 3.8% last year, the first annual decline in decades, dragged by the deepening slump in property investment and Beijing’s campaign to curb local debt risks and rein in excess capacity in some industries.