China keeps lending rates steady as Q2 growth beats expectations

Amid the escalating global trade tension, China has kept its benchmark lending rates unchanged. Beijing's this move signals confidence in recent economic performance even as deflationary pressure and weak domestic demand continue to cloud the outlook. China's central bank's decision comes days after Beijing posted better-than-expected second-quarter GDP figures, easing immediate pressure for fresh monetary stimulus. On Monday, the People’s Bank of China (PBOC) held both key lending rates steady, with the one-year Loan Prime Rate (LPR) at 3.0 per cent and the five-year LPR at 3.5 per cent, as per a Reuters report.

The decision matched expectations. In a Reuters survey of 20 market watchers, all had forecast no change to either rate. The one-year rate acts as a reference for most household and corporate loans, while the five-year rate is closely tied to mortgage pricing.

Growth tempers urgency for stimulus

The PBOC's wait-and-watch approach follows China’s second-quarter GDP figures, which showed the economy slowed less than expected, hinting at resilience amid rising US tariffs and global trade tensions. However, the underlying message from economists is one of caution.

According to Reuters, Tommy Xie, head of Asia macro research at OCBC, noted that China’s GDP deflator has been negative for nine straight quarters, reflecting weak nominal growth. “The weak nominal growth despite above-target real growth may weigh down corporate profitability as well as income growth". Xie further added that,“We expect PBOC to lower its benchmark interest rate by another 20 basis points this year, although the room for more aggressive rate cuts may be limited given the bottleneck faced by the economy.”

Pressure builds as Deflation deepens

As per Reuters, June data showed producer deflation worsened to its most severe level in nearly two years, signalling persistent price weakness despite stable headline growth. This deepening deflation is raising concerns among analysts, particularly as consumer demand remains subdued.

While the central bank has refrained from cutting rates further for now, many economists believe some form of monetary easing remains likely in the second half of the year, especially if domestic conditions deteriorate or external trade risks intensify.

Markets eye Politburo meeting

All eyes have now turned to the Politburo meeting later this month, which is expected to lay out China’s economic strategy for the remainder of 2025. Analysts, including those at Goldman Sachs, say two structural factors, deflation and domestic demand weakness which are likely to dominate the discussion and shape investor strategy in Chinese markets.

By holding key lending rates steady, China’s PBOC has signalled near-term confidence in economic momentum, but persistent deflation and fragile domestic consumption suggest that rate cuts or fiscal support may still be on the table in coming months.

(With inputs from the agencies)