China’s Central-Bank Governor Says Current Interest Rates Good

(Bloomberg) -- China’s central bank governor said the country’s current interest rates are at an appropriate level, and the bank will make decisions on interest rates based on domestic considerations.

China didn’t follow the Federal Reserve in raising interest rates last year, and it’ll 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 Governor Yi Gang said in an interview with Caixin published 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%, he said. “Therefore the current interest rates level are appropriate, or close to a ‘golden’ level, a comfortable level.”

Yi’s comments signaled policy makers 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, Yi pointed to a long-awaited reform to the rate framework that could help lower borrowing costs for the real economy.

PBOC Braces for the ‘Last Mile’ in Interest Rates Overhaul

In that reform, Yi said the benchmark lending rate will gradually fade out and be replaced by the Loan Prime Rate, 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 the PBOC makes to financial institutions, 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 ($43 billion) of targeted medium-term loans at 3.15%, and 200 billion yuan of regular medium-term loans at 3.30%.

Alone, these steps may not be enough to stabilize the economy. In the second quarter, China’s economy slowed to the weakest pace since quarterly data began in 1992 amid the ongoing trade standoff with the U.S., 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.

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