LPR remains unchanged for 10 consecutive months - Expert interpretation

Question: How does the pressure on net interest margin in commercial banks constrain interest rate adjustments?

According to China National Radio Beijing on March 20 (Reporter Feng Fang), on March 20, the People’s Bank of China authorized the National Interbank Funding Center to announce that the Loan Prime Rate (LPR) as of March 20, 2026, is 3.0% for the 1-year term and 3.5% for over 5 years. As of now, the LPR has remained unchanged for 10 consecutive months.

“With the LPR quotes for the two tenors remaining unchanged in March, it aligns with market expectations,” said Wang Qing, Chief Macro Analyst at Orient Securities. He explained that the reasons for the unchanged LPR are primarily twofold:

First, the pricing basis for the LPR has not changed. Since the last LPR quote, the policy rate (the 7-day reverse repo rate of the central bank) has remained stable, indicating that the basis for setting the March LPR has not changed, which largely suggests that the LPR will stay steady this month.

Second, there is currently little motivation to actively lower the LPR by adding a rate cut. Influenced by the People’s Bank of China’s large-scale liquidity injections through Medium-term Lending Facility (MLF) operations and reverse repos before the Spring Festival, major medium- and long-term market interest rates, including the yield on 1-year AAA-rated bank interbank certificates of deposit, have slightly declined. However, recent data shows that the net interest margin of commercial banks at the end of Q4 2025 remained at a historic low of 1.42%. Considering the re-pricing of loans at the beginning of the year, the net interest margin in Q1 2026 is still under some pressure to narrow. This indicates that the recent slight decline in wholesale funding costs in the money market has not yet been sufficient to motivate banks to actively lower the LPR by reducing the rate add-on.