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BEIJING – The People's Bank of China on Tuesday launched a refocused and market-based benchmark lending rate, which corresponds to an effective rate cut. The goal is to reduce borrowing costs and improve access to capital, especially for small businesses.
The central bank ordered banks to refer to the revised preferential loan rate, or LPR, when setting interest rates on new loans. It set the new rate at 4.25%, a reduction of 6 basis points from the previous LPR and 10 basis points below the government's benchmark government loan rate of 4.35%. The LPR will now be based on prices submitted by lenders in terms of interest rate dispersion on the central bank's medium-term open market operations.
The old LPR was closely correlated with the government reference rate, which has remained essentially stable since a 25 basis point reduction in October 2015. The medium-term loan facility rate of 3.3% of the PBOC is close to the real interbank lending rates.
Since the ultimate goal of the changes is to make borrowing cheaper for small and medium businesses, the rate announced on Tuesday was widely expected below the one – year benchmark. The move was called a rate reduction by another name.
The goal of the PBOC is to put an end to the mismatch between market rates and official rates, which has kept borrowing costs at stubbornly high levels, no matter how much market rates fall. Even though the overnight Interbank lending rate Shibor fell below the 1% mark for the first time in a decade at the end of June – a drop of more than a percentage point from at the end of 2018 – the average loan rate for this month has increased slightly over the same period. period at 5.66%.
The central bank is also seeking to use the reforms to discourage collusion among lenders seeking to avoid competition that would put pressure on their income. Banks set a floor on interest rates of 0.9 times the benchmark rate, according to the PBOC.
The new LPR will be released on the 20th of each month. The quotes will be provided by 18 banks, including the 10 major lenders currently participating, as well as regional, foreign, agricultural and private lenders.
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