Along with its move to cut interests rates and the required reserve ratio today, China’s central bank lifted the ceiling on rates banks can offer for deposits longer than one year.
In a statement accompanying its decision the People’s Bank of China called the move an “important step in interest-rate reform.” It said the step will promote independent pricing, and indicated reform of short-term deposit rates may be next.
China has long signaled a desire to tackle what it calls one of the “riskiest” parts of financial reform -- entirely scrapping the ceiling on interest rates that lenders pay on deposits. Over the past two years, China’s government has removed a floor on lending rates, allowed banks to pay up to 50 percent more than benchmark deposit rates and established a deposit insurance system.
The move is “one of the final steps in deposit rate liberalization,” Mark Williams, chief China economist at Capital Economics, wrote in a note.
China’s one-year benchmark deposit will be cut by 0.25 percentage points to 1.75 percent, effective from Wednesday, and the one-year lending rate will be cut to 4.6 percent.
For interest rates on demand deposits and short-term deposits with terms a year or less, banks can charge as much as 150 percent of benchmark rates, the PBOC said.
As the deposit-loan interest rate gap narrows, banks have been reluctant to raise deposit rates to the maximum. Industrial and Commercial Bank of China offers a one-year deposit rate of 2.25 percent, or just slightly above the benchmark rate.
The conditions are “almost ripe” for China to open up the rest of deposit rates, Ma Jun, the chief economist with the central bank’s research bureau, wrote in a note Tuesday.
— With assistance by Xin Zhou