PBOC to Explore Rate Corridor in Step Toward Liberalization

China’s central bank said it will explore ways of creating a band to guide the country’s borrowing and lending costs as the world’s second-largest economy aims for market-oriented interest-rate benchmarks to help the economy recover from its slowest growth in decades.

The People’s Bank of China will consider an interest-rate corridor mechanism for managing rates, it said in the latest quarterly monetary policy report released on Saturday. The PBOC lowered short-term borrowing costs for smaller banks in November in a move toward setting the Standing Lending Facility (SLF) rate as the ceiling and interest on excess bank reserves as a floor for rates.

The PBOC reiterated that it will continue with prudent monetary policy that will be fine-tuned at the appropriate time as it still sees downward pressure on Chinese economy.

In the report published on the official website days before the country’s Lunar New Year holidays, the central bank said it also seeks to implement “targeted reserve ratio cut” measures to support economic restructuring. Across-the-board cuts to banks’ reserve requirement ratios may increase depreciation pressure on the yuan’s depreciation, causing capital outflows and a decline in forex reserves, according to the PBOC.

With China facing the slowest expansion in a quarter century, the PBOC has cut the lending rate six times since Nov. 2014, most recently in October when it was set at a record low 4.35 percent. Policy makers have also reduced the required reserve ratio for the biggest banks. The PBOC created the SLF in 2013 as a vehicle to add funds to the banking system. The Medium-term Lending Facility followed in 2014, designed to provide lower-cost liquidity for designated banks.

Bloomberg