China takes step forward in interest rate reform
While PBOC's move points to further interest rate liberalisation, it also signals Li's failure to stem a downturn with the targeted approach
Beijing's interest rate cut may have effectively announced the failure of Premier Li Keqiang's targeted easing strategy to support the economy, but more importantly it signals the government's commitment to further interest rate liberalisation.
The first rate cut since the new government took office two years ago could be a prelude to giving banks more freedom next year in setting prices, although the immediate effect on credit growth may be limited, analysts say.
By doubling the ceiling for deposit rates and consolidating the categories of benchmark rates, the People's Bank of China has moved a step closer towards fully liberalising interest rates. If governor Zhou Xiaochuan's forecast in March was right, the day should come next year or by the end of 2016.
"Along with the [yuan] internationalisation, reforms in financial areas are likely to be the biggest catalyst for the China market in 2015," said Macquarie Research analyst Larry Hu.
It was likely that at some point next year, the mainland would fully liberalise benchmark deposit rates, Hu said.
On Friday, the benchmark one-year lending rate was cut by 40 basis points to 5.6 per cent while the one-year deposit rate was lowered by 25 basis points to 2.75 per cent. But the central bank also raised the ceiling for deposit rates to 20 per cent above the benchmark from 10 per cent.