HONG KONG (Reuters Breakingviews) - Temporary policies have a habit of becoming permanent, as the People’s Bank of China well knows. It might seek to half-follow a U.S. rate cut expected later this month, yet it’s not clear exactly how. Officials have been looking to scrap the benchmark rate that offers the most straightforward way to do so.
Federal Reserve Chairman Jerome Powell this week paved the way for a rate cut later in the month, the first in a decade. Assuming China’s central bankers want to shadow this - as they loosely did during the Fed’s tightening cycle - the question is how.
Beijing does not have a single, consensus policy rate. In the past, the central bank set benchmark lending and deposit policy rates for commercial banks. But officials liberalised those several years ago in favour of steering interbank lending rates, seen as the more market-friendly alternative.
Even so, the central bank continues to publish its old benchmarks, though the lending rate has been left unchanged at 4.35% since 2015. And banks continue to use it to price many loans. The awkward co-existence of both the bank and interbank lending rates is known as the “dual-track” rate system.
Officials want to “merge” the two tracks: the topic has been raised repeatedly this year and even enjoyed a special shout-out in the central bank’s first-quarter review. They have floated the idea of simply not publishing the old benchmark rates, perhaps frustrated that bank loan prices seem insensitive to their interbank rate-steering. Capital Economics noted in late May that while they had pushed down the three-month Shanghai Interbank Offered Rate by about 150 basis points over the preceding year, average loan rates declined only 25 basis points from a recent peak.
Beijing rate-setters are sounding out a switch to the so-called “loan prime rate”, according to Reuters, based on how much banks charge their best clients. But that’s a largely untested means of pricing loans and may not solve the issue of poor monetary policy transmission. As such, officials might want to keep their small nuclear weapon of a benchmark lending rate cut in their back pockets in case growth slows significantly later this year. When both the Fed and PBOC alike face a year rife with uncertainty, even an awkward status quo might have its merits.
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