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November 20, 2015

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Cut in interest rates of SLF for local banks

CHINA’S central bank yesterday said it will cut the interest rates of standing lending facility (SLF), a liquidity support tool, for local financial institutions.

The interest rates of overnight and seven-day SLFs for local financial institutions will be reduced to 2.75 percent and 3.25 percent respectively from today, the People’s Bank of China said.

SLF is a tool created by the PBOC in early 2013 to provide a large amount of funding to banks when they face a liquidity squeeze and are unable to get sufficient financing from the interbank market.

Early this year, the PBOC authorized its branches across the country to conduct SLFs and offer short-term liquidity to qualified small and medium-sized banks.

Yesterday’s move is aimed at helping make interest rates more market-based and is in line with the current liquidity situation, the PBOC said on its official microblog.

The cut marks the latest move toward creating what the central bank calls an interest rate corridor to guide borrowing costs after policy-makers scrapped a deposit-rate ceiling last month. PBOC officials have mapped out such a move toward setting the SLF rate as the ceiling and interest on excess bank reserves as a floor for rates.

“This is the first time the PBOC explicitly said it will use SLF rates as the ceiling of the interest rate corridor,” Becky Liu, Hong Kong-based senior rates strategist at Standard Chartered, told Bloomberg News. “It shows the central bank is under way to form a new policy rates framework.”

The central bank is shifting from a tightly regulated system where the PBOC conceived policy with quantitative outcomes in mind — such as the amount of new loans extended each month — to one where liquidity is determined by the price of capital.

Establishing a rate corridor would also help ensure banks can get easy access to cheap funds, even at times when cash runs short — cases that have typically caused a spike in short-term lending rates.

“This will help stabilize market expectation of liquidity, and avoid big volatility in money rates,” Liu Dongliang, a senior analyst at China Merchants Bank, wrote in a note.

He said the move is also a signal the central bank is trying to support small and medium-sized banks.

Previous SLF interest rate levels were not announced. The PBOC has not conducted any SLF since April, after pumping 335 billion yuan (US$52.5 billion) of liquidity into banks in the first quarter of this year.

China has cut its benchmark lending rate six times since November last year.


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