The People’s Bank of China (PBoC) has announced plans to cut interest rates in 2025, marking a significant shift towards a more orthodox monetary policy aligned with the US Federal Reserve and the European Central Bank.
In a statement to the Financial Times, the PBoC indicated it would reduce rates from the current 1.5% "at an appropriate time" next year.
The central bank emphasised that it would prioritise “the role of interest rate adjustments” over “quantitative objectives” for loan growth, signifying a transformative change in its monetary policy framework.
Unlike most central banks, such as the Federal Reserve, which rely primarily on a single benchmark interest rate to manage credit demand and economic activity, the PBoC employs multiple interest rates alongside unofficial guidance for banks on loan book expansion.
This approach has historically directed loans to high-growth sectors such as manufacturing, technology and property.
However, PBoC officials now see an urgent need for reform. By shifting focus from loan growth targets to interest rate adjustments, the central bank aims to modernise its policy toolkit and enhance its responsiveness to economic changes.
For decades, the PBoC’s quantitative guidance was instrumental in driving China’s rapid economic expansion. This planned move towards a conventional interest rate-driven system reflects the bank’s intent to align with global best practices and bolster economic stability.
“Rate reform is likely to be the true focus of the PBoC in 2025,” said Richard Xu, chief China financial analyst with Morgan Stanley (NYSE:MS) in Hong Kong. “China’s economic development urgently needs to shift from a mindset focused solely on expanding the market size [of banks’ loan books].”