China’s central bank now has ‘bigger say’ over lending rates, but analysts question level of impact
- The People’s Bank of China now requires banks to benchmark their loan rates against the medium-term lending facility instead of the official benchmark
- The change is part of a long-term modernisation process within the world’s second largest economy to have a market-oriented central banking mechanism
China’s central bank has gained a “bigger say” in deciding the country’s lending rates after taking a subtle but significant step towards monetary policy independence, but analysts have questioned the level of impact the mechanism change will have.
The central bank, in theory, can change interest rates for mortgages and other borrowing contracts by tweaking the MLF rates in the interbank market as these are under full control of the PBOC.
By sidelining the official benchmark lending rate – the one-year rate of 4.35 per cent which has been kept unchanged since October 2015 – the PBOC has essentially gained control of all lending rates in the world’s second largest economy and, potentially, could engineer a modest rate cut.
This, some analysts said, will help the PBOC transform itself into an independent, modern central bank with greater autonomy over monetary policy compared to a bureaucratic government agency rolling out decisions made by the country’s senior leaders. Unlike its peers such as the US Federal Reserves and the European Central Bank, China’s central bank is a ministerial agency within the Chinese government.