China set to keep rates steady as Mideast war clouds inflation outlook
Market watchers said Beijing’s target of 4.5% to 5% economic growth for 2026, slightly below last year’s 5% growth, combined with better-than-expected economic activity data in the first two months, had reduced the urgency to offer stimulus to support the overall economy.
The loan prime rate (LPR), normally applied to banks’ best customers, is calculated every month after 20 designated commercial banks submit recommended rates to the People’s Bank of China (PBOC).
In a Reuters survey of 20 market participants this week, all expected both one-year and five-year LPRs to remain steady at 3.00% and 3.5%, respectively, on Friday.
Global oil prices have risen nearly 50% since the start of the US. and Israel’s war with Iran triggered an oil shock that shook global financial markets.
“The moderate and temporary increase in oil prices is likely to have a limited impact on the Chinese economy,” Standard Chartered analysts said in a note. he said.
“However, further escalation of the conflict in the Middle East – especially if supplies of key commodities are tightened – will be reflected in global supply chains and demand, ultimately putting pressure on China’s exports and growth.” They now expect China to delay implementing monetary stimulus, withdraw the previously anticipated 25 basis point reduction in the required reserve ratio (RRR) from the first quarter to the second quarter, and withdraw the policy rate reduction by 10 basis points from the third quarter. from the second due to increasing geopolitical risks.
But Marco Sun, chief financial market analyst at MUFG (China), said China remains well insulated from energy price shocks given its sufficient energy reserves.
“Energy shocks are unlikely to materially affect the PBOC’s monetary policy stance,” Sun said.
“The central bank will maintain an accommodative monetary policy and adjust key benchmark interest rates to offset domestic pressures that are increasing financing costs.”
Strong expectations for fixed LPR pegs also come as major global central banks remain decisive on interest rate decisions.
The U.S. Federal Reserve and the Bank of Canada struck a hawkish tone in their policy reviews Wednesday as the Iran war has pushed up energy prices sharply and threatened a new wave of inflation.
