PBOC holds rates steady despite weakening recovery

The People's Bank of China defied expectations to keep benchmark interest rates unchanged on Friday despite calls to ease policy in the face of a weak economic recovery.

Despite recent dovish guidance in the aftermath of a raft of poor economic data for August, the PBOC held the one-year loan prime rate steady at 3.35% and the five-year rate at 3.85%.

Many economists had pencilled in a cut of 10 basis points to each rate, following in the footsteps of the Federal Reserve which eased policy earlier this week.

"The August activity data confirmed our fears that China is likely to miss its 5% GDP growth target this year and likely triggered alarm bells among policymakers," said analysts at TD Securities in a research note earlier this week.

While further cuts from the PBOC are still expected this year, officials have cited weakening net interest margins at the nation's banks as a key reason to act cautiously.

In July, the bank cut interest rates by 10 basis points in a move that caught markets off guard. At the time, Oxford Economics noted the PBOC's "complex policy calculus between anaemic domestic activity, currency weakness, structurally-weak credit demand, and banks’ compressed net interest margins".