China's current interest rates at appropriate level: PBOC head

Beijing

CHINA'S central bank governor said that the country's current interest rates are at an appropriate level, and that the bank will make decisions on interest rates based on domestic considerations.

China did not follow the US Federal Reserve in raising interest rates last year, and it will continue to "look at its own real situation" when making rate decisions now that the Fed is likely to cut, People's Bank of China (PBOC) governor Yi Gang said in an interview with Caixin published on Tuesday.

"Lowering interest rates is mainly to tackle deflationary risks, but China's inflation is moderate at the moment," with consumer price gains at 2.7 per cent, he said. "Therefore the current interest rates level are appropriate, or close to a 'golden' level, a comfortable level."

His comments signalled that policymakers remain satisfied with the targeted approach of stimulus for now, even with the economy slowing.

Rather than a straightforward cut to the benchmark interest rate, Mr Yi pointed to a long-awaited reform to the rate framework that could help lower borrowing costs for the real economy.

In that reform, Mr Yi said, the benchmark lending rate will gradually fade out and be replaced by the Loan Prime Rate (LPR), or the rates banks offer to their best clients. The LPR will make reference to more market-oriented interest rates, such as the cost of medium-term loans that the PBOC makes to financial institutions, Mr Yi said.

On Tuesday, the PBOC continued with its strategy of supplying banks with cheap liquidity in an effort to funnel cash to the economy. The central bank offered 297.7 billion yuan (S$59 billion) of targeted medium- term loans at 3.15 per cent, and 200 billion yuan of regular medium- term loans at 3.3 per cent.

Alone, these steps may not be enough to stabilise the economy. In the second quarter, China's economy slowed to the weakest pace since quarterly data began in 1992 amid the ongoing trade stand-off with the US, though monthly indicators showed some improvement in June.

"Monetary policy has become easier since last year but it hasn't effectively pushed down the real borrowing cost much, underlining the urgency to reform the current interest rates," said Jiang Chao, an analyst at Haitong Securities Co. BLOOMBERG