Bank deposit rates in China may be free at last

June 4, 2015 2:08 PM (UTC+8)

 

The tea leaves at the bottom of China’s financial tea cup keep pointing to greater interest rate liberalization.

China Business News quoted a People’s Bank of China (PBOC) official on Thursday as saying that the central bank is “likely” to remove the ceiling on bank deposit rates soon, rather than raising the cap again.

“I believe removal of the ceiling on deposit rates is not far off,” the China Business News quoted Sheng Songcheng, head of the PBOC’s statistics department as saying. Sheng hinted that regulators should do away with the cap on bank deposit rates “when time is appropriate.” He also said it wouldn’t make sense to raise the ceiling again.

Some analysts are betting the PBOC will free up deposit rates during its next interest rate cut. If it nixes the ceiling on bank deposit rates, it will be a critical step in allowing market forces to determine the cost of credit, giving China’s economy greater equilibrium. The strategy is that cutting rates and bank reserve requirements drives demand for credit and increases money supply.

The PBOC last cut interest rates in May, lifting the ceiling for deposit rates to 1.5 times the benchmark. It was the third interest rate cut since November.

The central bank is widely expected to cut interest rates and bank reserve requirements further in coming months to offset slowing economic growth.

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