LPR reform confirms domestic orientation of monetary policy

On Aug 17, the People's Bank of China, the central bank, announced it will re-benchmark the loan prime rate or LPR on the basis of one-year medium-term lending facility or MLF rate (previously on the basis of benchmark lending rate).

The LPR will be quoted on the 20th of each month. In August and September, the LPR was lowered by 6 basis points and 5 basis points, respectively. This was widely perceived as an important step forward in the interest rate liberalization, and also a new form of rate cuts.

The LPR reform is an important effort to address the interest rate segmentation problem - that is, the coexistence and divergence between two sets of interest rates.