Friday, November 20, 2015

PBoC cut borrowing costs to support slowing economy

FXStreet (Mumbai) - In an attempt to tackle a flagging economy, the People's Bank of China today cut interest rates for loans made under the standing lending facility (SLF). The PBoC decided to cut the overnight SLF lending rate to 2.75% and the seven-day rate to 3.25% as. The objective is to inject cash into the banking system to support the slowing economy. The SLF was launched in 2013 to supplement other monetary policy tools such as open market operations.

The overnight rate will be cut to 2.75 per cent while the seven-day rate is to be slashed to 3.25 per cent, effective Friday. The rates now stand at 4.5 per cent and 5.5 per cent, respectively.

With this step the central banks plans to lower borrowing costs for businesses. The decision has come at a time when Chinese banks face a surge in troubled loans and is in line with recent policy easing to support the slowing economy.

The decision comes on the heels of the six benchmark rate cuts in the last twelve months. China's central bank cut interest rates on for the sixth time in less than a year on 23rd October. It also lowered the amount of cash that banks must hold as reserves to revive its stuttering economy.

What does the PBoC aim to achieve with this interest cut?

The PBoC opined that the cut to SLF rates will help to 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".

While deciding on the cut, the central bank has considered the current liquidity condition as well as the need to adjust monetary policy. Data showed outstanding SLF stood at zero as of end-October with no activity for several months.

The central bank had when it cut benchmark rates in October lifted caps on bank deposit rates to liberalise interest rates. It said it would continue to publish benchmark market rates while at the same time trying to develop market-based interest rates. It aims to use repos and the SLF rates to guide short-term interest rates. The bank intends to use this short term interest rates for relending, Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL) to guide the medium- and long-term rates.

The PBOC is likely trying to develop an interest rate corridor with an objective to reduce volatility of money-market interest rates and also lower the cost of central bank operations.
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