PBC launches interest rate reform to cut costs
The People’s Bank of China (PBC), the country’s central bank, has improved a key interest rate mechanism to reduce borrowing costs, a move that experts said is intended to help enterprises and boost the economy after recent figures pointed to growing downward pressure.
“By perfecting the loan prime rate (LPR) mechanism, loan rates will edge down via market-oriented reforms,” a representative of the PBC said on Saturday.
According to a PBC document published on its official website, the new LPR quotations will be based on open market operation rates – mostly the medium-term lending facility (MLF) – and will be published by the national interbank funding center once every month starting Tuesday.
“Starting immediately, all banks must mostly refer to the LPR when setting rates on new loans…banks cannot set implicit bottom lines of the LPR in any form,” read the PBC statement.
The PBC also said it would add eight banks, including urban commercial banks, rural commercial banks, overseas banks and private banks, to the 10 major domestic banks that will be allowed to submit LPR quotations.
Chen Ji, an economist at the financial research center of the Bank of Communications, told the Global Times that under the new LPR mechanism, the central bank can more efficiently channel the influence of its monetary policy to the market by closely pegging the LPR with the MLF.
Experts said previously that the PBC was more inclined to use open market operation tools like the MLF than adjusting benchmark rates.
“The market will be able to understand the central bank policy inclination more explicitly under the new LPR mechanism,” Chen said.
But experts at the Bank of Communications financial research center also noted that when the MLF is closed linked with the credit market, the government might become more cautious when using open market operations in the future.