China central bank cuts borrowing costs, eyes market-based rates

The overnight rate will be cut to 2.75% and the seven-day rate to 3.25%, effective Friday

China will lower lending rates for loans made under the standing lending facility (SLF), a policy tool to inject cash into the banking system, in the latest step to support the slowing economy.

The overnight rate would be cut to 2.75% and the seven-day rate to 3.25%, effective Friday, the People's Bank of China (PBOC) said in its official microblog on Thursday. The rates are now at 4.5% and 5.5%, respectively.

The fresh move to lower borrowing costs for businesses is in line with recent policy easing to support the slowing economy and as Chinese banks face a surge in troubled loans.

"There is no doubt that the central bank's move is aimed at lowering the cost of bank liquidity," said Xue Hexiang, a strategist at Huatai Securities.
 

 

Li Huiyong, an economist at Shenyin & Wanguo Securities, said the cut to the SLF signalled more policy easing ahead.

He expects the PBOC to cut benchmark interest rates by 25-50 basis points in 12 months and also to cut bank reserve requirement ratios.

China's central bank cut interest rates on Oct. 23 for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy.

Interest rate corridor

The central bank said the cut to SLF rates would help develop a market-based "interest rate formation mechanism" by "facilitating the role of SLF interest rates in forming the ceiling of an interest rate corridor".

The step took into account the current liquidity condition and the need to adjust monetary policy, it said without elaborating.

Outstanding SLF stood at zero as of end-October, data showed, with no activity for several months. SLF rates were cut in March, sources with direct knowledge of the matter told Reuters.

The central bank, when it cut benchmark rates in October, lifted caps on bank deposit rates to liberalise interest rates, but it said it would continue to publish benchmark market rates while trying to develop a set of market-based interest rates.

It said it would use repos and the SLF rates to guide short-term interest rates and would use interest rates on relending, Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL), to guide the medium- and long-term rates.

Central bank researches have said recently that the PBOC is trying to develop an interest rate corridor to reduce the volatility of money-market interest rates and lower the cost of central bank operations.