Chinese banks maintained their benchmark lending rate for a 10th straight month, as pressure on the yuan restricts policymakers’ space for easing.

The one-year loan prime rate was kept at 3.45%, according to a statement from the People’s Bank of China on Thursday, in line with most economists surveyed by Bloomberg.

The five-year rate, a reference for long-term loans including mortgages, stayed at 3.95%

The LPRs are based on the interest rates that 20 banks offer their best customers. They are quoted as a spread over the central bank’s one-year policy rate, or the medium-term lending facility rate, which the PBOC left unchanged for the 10th month earlier this week.

The central bank is holding interest rates because lowering them would widen China’s policy divergence with the Federal Reserve, which is expected to keep rates higher for longer, and exacerbate pressure on the yuan to weaken.

Bloomberg Economics’ economist Eric Zhu said the MLF rate will likely fall by no more than 20 basis points this year, less than than the 30 basis points projected at the start of 2024.

If that came to pass, “the lower MLF rates would give commercial banks room to reduce lending rates without squeezing their profit margins,” he said.

Weak borrowing demand and the Chinese economy’s longest deflationary streak since the 1990s are making the case for lower borrowing costs to stimulate demand.

PBOC governor Pan Gongsheng stoked speculation the LPR would be lowered in coming months on Wednesday, when he said in a speech that some banks’ quotes of the rate significantly deviated from the actual best lending rate they offer to clients.

Lenders may need to correct that by lowering the LPR by 10 to 20 basis points, likely in the second half of this year, Societe Generale SA economists wrote in a note Wednesday.

In May, the PBOC scrapped a national minimum mortgage rate that had been linked to the five-year LPR, weakening the rate’s role as a threshold for mortgages. Chinese cities can now decide if they will keep a mortgage rate floor and its level.

  - Bloomberg