A general view of shoppers is seen in a retail store in Shanghai, China, on May 10, 2025, as China’s CPI declines in April amid a trade war.
Ying Tang | Nurphoto | Getty Images
China cut its key lending rates by 10 basis points on Tuesday, as a stronger yuan and easing trade tensions offer it room for monetary easing aimed at boosting its economy.
The People’s Bank of China trimmed the 1-year loan prime rate to 3.0% from 3.1%, and the 5-year LPR to 3.5% from 3.6%.
This marked the first reduction in rates since the central bank’s 25-basis-point cut in October, as Beijing intensifies efforts to shore up its economy.
The benchmark lending rates — normally charged to banks’ best clients — are calculated monthly based on designated commercial banks’ proposed rates submitted to the PBOC.
The 1-year LPR influences corporate and most household loans in China, while the 5-year LPR serves as a benchmark for mortgage rates.
The rate cuts came as a slew of state-backed commercial lenders moved to reduce their deposit rates by as much as 25 basis points earlier Tuesday in an effort to protect their net interest margin, paving the way to lower key lending rates.
The PBOC is likely to continue to ease policy, Zichun Huang, chief economist at Capital Economics said in a note, forecasting the lending rates to be lowered by another 40 basis points by year-end.
The bundle of rate cuts came as part of a package of stimulus measures announced by Beijing earlier this month, including reductions to the lending rates and the amount of cash that banks must hold in reserves. Mortgage rates under the nation’s housing provident fund, a government-backed housing lender, was also lowered by 25 basis points.
Chinese offshore yuan has shaken off some depreciation pressure to stay relatively stable, in no small measure due to a weakening U.S. dollar. The currency has strengthened over 2.8% against the greenback since it notched a record low of 7.4287 last month, according to LSEG data.
Allan von Mehren, China economist at Denske Bank, revised the 12-month target for the offshore yuan to 7.15 from 7.35 on the back of trade de-escalation and Beijing’s “clear preference for currency stability.”
Calls for stimulus
Modest rate cuts alone may not “meaningfully” boost loan demand and revive the broader economy, Huang said, noting that “the burden of supporting demand mostly rests with fiscal policy.”
Policymakers, however, may be less inclined to expand fiscal support beyond what was announced in this year’s budget following the recent tariff de-escalation, Huang added.
Trade-war fears have receded after a meeting of U.S. and Chinese trade representatives in Switzerland earlier this month led to a lower set of levies between the world’s two largest economies. Beijing and Washington agreed to roll back most tariffs for 90 days, allowing some room for further negotiation to reach a more lasting deal.
That prompted a slew of global investment banks to raise their forecasts for China’s economic growth this year while paring back expectations for more proactive stimulus as Beijing strives to reach its growth target of around 5%.
Nomura raised its forecast for China’s GDP growth for quarter ending June to 4.8% from 3.7% on the back of resilient economic data in April, while lifting the full-year growth projection to 3.7% from 3.5%.
Despite the near-term upside, the bank cautioned “a high risk of the economy suffering from a double whammy” due to the prolonged housing slump and possibility of U.S. ratcheting up tariffs again.
Chinese authorities have set an ambitious growth target of “around 5%” this year.
Wholesale prices posted their steepest drop in six months in April, while consumer prices fell for a third moth, underscoring the persistent deflationary pressure in the economy. While the economy is grappling with the drag of deflation, economists widely anticipate Beijing to roll out additional stimulus in staggered way and at a slower pace.
Additional stimulus measures are likely to be “lighter and delayed given a lower tariff path,” a team of economists at Morgan Stanley said in a note Monday.
Despite the tariff reprieve, U.S. trade-weighted tariff rate on China remained elevated at 40%, well above the 11% levies before Trump returned to the office, according to the investment bank’s estimates.
“Deflation could linger, given still elevated tariffs and reactive policy,” Morgan Stanley added, as higher tariffs will ultimately dampen external demand after the near-term export front-loading activity tapers off, exacerbating domestic excess capacity issue.
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