PBOC Cites Downward Pressure on Economy in Q&A After Rate Cuts

The following is Bloomberg’s translation of a statement from the People’s Bank of China in question and answer format that accompanied its interest rate cut announcement.

1. What are the major considerations behind the cut in lending and deposit benchmark interest rates?

A: The cut in benchmark deposit and lending rates is primarily to play the guidance role of benchmark interest rates, to further lower social financing costs, and to support the continuous and healthy growth of the real economy. In accordance with the arrangements of the State Council, the People’s Bank of China had cut benchmark loan and deposits interest rates twice, in November 2014 and March 2015 respectively. With the gradual implementation of various policy measures, lending rates of financial institutions have continued to fall, market interest rates dropped significantly, and the overall costs of social financing have been reduced. At present, China is accelerating domestic structural economic adjustments and seeing volatile external demand, and China’s economy faces relatively large downward pressure. At the same time, the overall inflation level is low, the real interest-rate level is above the historical average, for which there was room to use the interest-rate tool. In view of this, the People’s Bank of China decided to cut benchmark lending and deposit interest rates by 0.25 percentage points from May 11, 2015 to create a neutral and appropriate monetary and financial environment for economic restructuring and enhancement.

2. Along with the rate cut, the floating range of deposit rates is widened to 150 percent of the benchmark. What’s the background and significance of this change?

A: At present, China has fully liberalized all interest rates apart from deposit rates, and the ceiling of deposit rates has been raised continuously, along with improvement of independent pricing capabilities of financial institutions. A deposit rate pricing market pattern of layered, orderly and differentiated competition has basically come into existence, and a market-based interest rate formation and transmission mechanism has been developed. At the same time, the successful launch of the deposit-insurance system, along with the establishment and improvement of a market interest rate pricing self-regulation mechanism, has laid a good foundation for accelerating the deposit interest rate liberalization. At present, the overall liquidity in the banking system is sufficient with money market interest rates tending to move downwards, and this in fact has created a favorable external environment and time window for the full abolishment of deposit interest rate ceiling. To promote interest-rate liberalization in a steadily and orderly manner, the People’s Bank of China has decided to raise the deposit interest rate ceiling to 1.5 times the benchmark, in tandem with the interest-rate cut. As not many financial institutions are offering ceiling deposit rates, basically, financial institutions won’t raise deposit rates to the new ceiling.

The raised deposit-rate ceiling is another important step in China’s market-oriented deposit interest rate reform. It will broaden the independent pricing scope of financial institutions to further improve their abilities of independent pricing and to push them to accelerate business model transformation and financial services improvement, which eventually will lay a more solid foundation for full abolishment of the deposit-rate ceiling; it will also help money prices to better reflect market supply and demand, to promote the formation of a savings structure that is balanced and in accordance with the wishes of depositors as a way to further optimize allocation of resources and to promote healthy economic and financial development.

3. What will PBOC do to guide financial institutions in making scientific and reasonable pricing after the raised ceiling of deposit rates?

A: To guide financial institutions for scientific and reasonable pricing and to maintain a fair and orderly market competition order, the People’s Bank of China will continue to publish the benchmark deposit and lending rates as a way to further play a guiding role of the benchmark interest rates and to provide important references for pricing by financial institutions. At the same time, the People’s Bank of China will further improve the interest-rate control system to improve the benchmark interest-rate system in the financial market and to improve the efficiency of monetary policy transmission. In addition, the People’s Bank of China will also provide guidance on market interest rate pricing self-discipline mechanism, to further play the role of self-discipline, by taking incentive and restraint moves -- financial institutions with good interest-rate pricing will be given greater autonomy and product innovation rights while financial institutions with unreasonable interest-rate pricing and market order disruption will be restrained.

4. What are the considerations of People’s Bank of China for further interest-rate control and interest-rate liberalization?

A: The interest rate liberalization, along with interest rate cuts, is mainly to adapt to the changing trends in economic fundamentals, to promote real interest rates to reasonable levels, and to let the market play a decisive role in the allocation of resources. In the next step, we will follow strategic arrangements made by the Communist Party Central Committee and the State Council to continue to implement prudent monetary policy and to keep a balance between easing and tightening. We will make appropriate adjustments according to changes in liquidity supply and demand as well as inflation and economic conditions, and we will make comprehensive use of price and quantity tools to maintain a neutral and appropriate monetary environment and to find a fine balance between maintaining growth and adjusting structure. At the same time, we will put more focus on innovation to combine reforms with control and to link monetary policy operations with deepening of reforms to accelerate the launch of big-value certificates of deposit for companies and individuals, to broaden the scope of independent pricing of financial institutions, to actively promote market-oriented interest rate reforms, and to constantly enhance the central bank’s capabilities in interest rate management and effectiveness on macro-economic control.

— With assistance by Xin Zhou

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