China's central bank cuts borrowing costs

The People’s Bank of China said it will cut interest rates for the Standing Lending Facility, which is the interest rate on loans it gives to banks, in what amounts to a test of its new monetary policy framework.

In a statement on Weibo – China’s version of Twitter – the PBoC said it would cut the overnight SLF lending rate to 2.75% and the seven-day rate to 3.25% as of Friday.

The move follows six benchmark rate cuts in the last twelve months, as China attempts to tackle its flagging economy.

“In the past, the People’s Bank’s primary policy tools were the benchmark rates for lending and deposits. These are less effective now that the interest rate ceilings and floors that tied actual rates to the benchmarks have been abolished (although they still matter),” Capital Economics’s chief Asia economist said in a research note sent to clients.

The decision was taken to speed up the creation of an interest rate formation and control mechanism that meets market demands and to explore the use of the SLF as the upper ceiling of an interest rate corridor, the PBoC said in a statement.

“The main significance of today’s announcement by the People’s Bank (PBOC) that it is cutting standing lending facility (SLF) interest rates is that it is experimenting with a new monetary policy framework.

“This shift in itself does not constitute monetary loosening but we do believe that the People’s Bank retains an easing bias,” Williams added.