China’s central bank told lenders to hold off from using the extra room to raise deposit rates that officially became available from May 11, according to people familiar with the matter.
The people asked not to be identified because the guidance wasn’t made public. The People’s Bank of China didn’t immediately respond to a faxed request for comment.
The twist of loosening restrictions via a higher interest rate ceiling -- it was boosted to 1.5 times benchmark levels from 1.3 times -- and then tightening via instructions to lenders shows China’s struggle to push through reforms in a faltering economy. Revamping deposit rates is the “riskiest” part of rate liberalization, the central bank said previously.
BNP Paribas SA banking analyst Judy Zhang said in March that China’s plans to scrap the ceiling on deposit rates could be “meaningless” if the central bank persisted with instructions to lenders on where they could set rates.
In the long-term, market reforms may strengthen the economy. In the short-term, excessive competition for deposits could flow through to higher borrowing costs for companies and increased risks of instability in the financial system.
The central bank had already signaled that it wouldn’t stand aside as lenders set rates, saying in a statement after a rate cut and the increase in the deposit rate ceiling that it would “provide guidance.” It also said that financial institutions with “good interest-rate pricing” would get benefits, while those with “unreasonable” pricing would be restrained.
Reuters earlier reported the latest PBOC guidance.
— With assistance by Laura Yin, Steven Yang, Heng Xie, and Jun Luo