BOFIT Weekly Review 2015/10
PBoC continues to deregulate interest rates
On Sunday (Mar. 1), the People’s Bank of China lowered the reference lending and deposit rates for banks by a quarter of a percentage point. The reference one-year lending rate fell to 5.35 %, while the one-year deposit rate fell to 2.5 %.
Banks were also allowed to increase their power in setting deposit rates. Banks can now pay interest on deposits 30 % higher than the reference rate. Earlier the ceiling on deposit rates was 20 % above the reference rate. Deposit rate-setting rules were also relaxed as part of the previous rate cut. Lending rates were completely deregulated in summer 2013.
The PBoC this week lowered rates on special lending tools offered directly to commercial banks. The overnight rate was reduced by 0.5 p.p. to 4 % and the 7-day interest rate by 1.5 p.p. to 5.5 %. The measure will hopefully improve corporate access to credit. Interbank rates and money market rates, however, fell only slightly after the PBoC rate cuts. There have been public calls for the PBoC to adopt easing measures to deal with the slowdown in economic growth. Low inflation has indeed raised real interest rates, which was a reason the central bank stated for cutting rates.