The People’s Bank of China (PBOC) has reduced rates for one of its key interest rate tools, as it seeks to increase liquidity in the Chinese financial system in the lead up to the Spring Festival Vacation.
Starting from 17 January PBOC reduced rates for its Standing Lending Facilities (SLF) by 10 basis points, bringing the overnight rate to 2.95%, the 7-day rate to 3.10% and the 1-month rate to 3.45%.
The move coincided with a reduction in rates for its 1-year medium-term lending facilities (MLF) and 7-day reverse repos by 10 basis points, bringing them down to 2.85% and 2.10% respectively.
Domestic analysts say the move effectively means the ceiling for China’s interest rate corridor has declined by 10 basis points, given the SLF’s key role in this regard.
PBOC uses SLF to provide short-term financing to Chinese financial institutions. As of the end of December 2021 the SLF stood at 12.68 billion yuan.
In an essay written in 2021 PBOC governor Yi Gang (易纲) said that the SLF rate can be considered the ceiling for China’s interest rate corridor, as financial institutions will be unwilling obtain funds from the market at a higher rate.
The floor for China’s interest rate corridor is considered to be the interest rate on excess reserves, which currently stands at 0.35%.
According to Yi Gang the use of SLF as the ceiling and the interest rate on excess reserves as the floor for China’s interest rate corridor can help to keep volatility in short-term interest rates within “rational bounds.”