Move aims to support business growth
Print Edition
THE People’s Bank of China yesterday reduced interest rates for the first time since 2012 as it sought to bolster the economy amid a protracted slowdown.
The one-year benchmark deposit rate was cut by 0.25 points to 2.75 percent, while the one-year lending rate was trimmed by 0.4 points to 5.6 percent, the central bank said in a statement.
The new rates are effective from today.
Lenders are also allowed now to offer deposit rates of up to 20 percent higher than the benchmark — up from 10 percent previously — as the authority seeks to further liberate interest rates.
Despite the new rules, the ceiling for the one-year deposit rate will remain unchanged at 3.3 percent, which most banks are currently offering.
For mortgage borrowers, the lower rates will mean a saving of 234 yuan (US$38) a month on a 20-year loan of 1 million yuan, while business customers will also see their repayment costs fall.
Qu Hongbin, HSBC’s chief economist for China, said the central bank’s move is an important step in bolstering the economy and could be followed by further loosening measures.
“Domestic demand has been weaker than expected since April and is still slowing,” Qu said.
“An interest rate cut was urgently needed as inflation is cooling, production is inefficient and borrowing costs are high,” he said.
The interest rate cut — the first since June 2012 — came after recent economic data showed factory growth had stalled and the nation’s property market, long a pillar of growth, remained weak.
Sluggish demand in industrial sectors was also evidenced in the latest HSBC Flash China Manufacturing Purchasing Managers’ Index released on Thursday, which suggested that manufacturing activity might grow at its slowest pace in six months in November.
The interest rate reductions came as a surprise to the market, however, as many economists believed the central bank would hold off on sweeping reductions, as such easing measures go against the government’s resolution to reform the country’s economic structure.
But the central bank said it had taken into account the aims of both reform and stimulus, saying that the cuts on the lending side were larger than those on the deposit side, and that it had further liberated the deposit rate.
Such an arrangement will help to maintain a stable interest rate for savers, support people’s income and spending power while encouraging businesses to expand, it said.
The cuts were also intended to reduce borrowing costs for small firms and guide interest rates lower in other funding channels such as the bond market and private lending, the central bank said.
Earlier in the year, the PBOC introduced various short-term liquidity tools and targeted easing measures for key sectors in a bid to stabilize the economy.
It has also attempted to lower market borrowing costs by cutting the rate on its bond sales to commercial banks.
Wang Tao, an economist at UBS, said that while cutting interest rates is more effective in lowering borrowing costs than targeted easing measures, it alone cannot guarantee the faster credit expansion needed to drive GDP growth.
“The main effect of today’s rate cuts will be to reduce the debt pressure on companies, and improving corporate cash flow and balance sheets. But it will have limited impact on corporate credit demand, which has been depressed by excess capacity and weak domestic demand,” Wang said
While banks will benefit from borrowers’ better asset quality and the slower growth in bad loans, their profits from interest rate margins will be narrower, according to Wang.
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