China’s One-Year Policy Loan Rate Drops to 1.5% Under New Pricing Model

In an effort to stimulate a sluggish economy, the People’s Bank of China (PBOC) has allowed the interest rate on its one-year policy loans to reach an unprecedented low. According to sources familiar with the matter, the central bank permitted some lenders to access the Medium-Term Lending Facility (MLF) at rates as low as 1.5% this January. This represents a decrease from the 1.55% recorded in December and sits well below the last official benchmark of 2% reported a year ago.

The shift follows a strategic move by the PBOC to overhaul its loan pricing mechanism. Since last March, the central bank has moved away from publishing a single, uniform MLF rate, instead allowing banks to bid for funds at varying rates to better address diverse institutional needs. While the exact portion of January’s 900 billion yuan ($130 billion) in MLF loans issued at this record-low rate remains unspecified, the downward trend underscores a cautious, "drip-feed" approach to monetary easing. Rather than deploying massive stimulus packages, Chinese authorities are opting for subtle, incremental adjustments to lower funding costs without destabilizing the broader financial system.

This strategy coincides with a broader transition in how the PBOC manages market liquidity. The central bank is increasingly prioritizing its seven-day reverse repurchase agreements as its primary policy tool, with that benchmark rate recently sliding to 1.4%. Despite the PBOC's efforts to diminish the MLF’s status since late 2024, the facility remains a vital resource for commercial banks.

Lowering these borrowing costs serves a dual purpose. First, it provides much-needed momentum for an economy struggling with a persistent real estate crisis and deflationary risks. Second, it offers relief to commercial lenders whose profit margins have been squeezed by narrow interest spreads. Recent comments from PBOC officials suggest that as these margins stabilize, there is more leeway to reduce policy rates further. To bolster this support, the central bank has also introduced record amounts of liquidity through various channels, including three- and six-month reverse repos, alongside the one-year MLF. By making credit more affordable for banks, the PBOC hopes to encourage lending and foster a more robust economic recovery during a period of significant financial fragility.