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SLF rate cut good for market: analysts

Xinhua, November 20, 2015 Adjust font size:

The Chinese central bank's cuts to the interest rates at which its local branches can obtain credit should ensure low market interest rates and ample liquidity, analysts have said.

In a rare move on Thursday, the People's Bank of China (PBOC) lowered interest rates for the standing lending facility (SLF) to 2.75 percent and 3.25 percent for a maturity of overnight and seven days, respectively. The policy entered into effect on Friday.

Before the cut, the interest rates were 4.5 percent and 5.5 percent for overnight and seven-day SLFs. The PBOC has not conducted SLF operations since March, and there are currently no SLF loans outstanding, according to a report by the research department of investment bank CICC.

"The move is designed to ensure short-term interest rates stay low and hence support the economy," said the report. "SLF interest rates... act as a ceiling on market interest rates. After being lowered, the ceiling becomes a more binding constraint, which helps hold the market rates down."

The SLF rate cut will lower the liquidity risk in the interbank market, according to CICC, noting that if the PBOC commits to provide liquidity at this level, there is unlikely to be a repeat of the interest rate spike seen in the 2013 liquidity squeeze.

CICC forecast more SLF operations.

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. As a newly created liquidity support tool, it is similar to the European Central Bank's Marginal Lending Facility.

Development of the SLF mechanism is "part of the necessary revamp of China's monetary framework" as "benchmark deposit rates are no longer an effective tool after the ceiling control was removed in October," according to the CICC report.

"The SLF mechanism will help the PBOC seize better control over its policy rate, by at least imposing an upper limit," it said.

Fan Jianping, chief economist with the State Information Center, explained, "To put it simply, if commercial banks cannot raise enough capital from the interbank market at an interest rate lower than the SLF interest rate, the central bank will offer them money via SLF."

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.

Thursday's move was 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 PBOC pumped 335 billion yuan (52.5 billion U.S. dollars) of liquidity into banks in the first quarter of this year, in its last SLF operation. Endi