Reduce the cost of financing
The move helps lower the cost of financing for banks, as monetary policymakers call on the financial sector to help the millions of companies struggling with shutdowns aimed at curbing the spread of the highly contagious mutated Omicron.
The move could also pave the way for lowering the benchmark loan rate, the benchmark lending rate, to be announced next week.
Reducing the interest that banks pay on deposits will enable them to charge lower fees on loans, and keep margins unchanged.
Negative economic repercussions of the “Covid” closures in China
Earlier on Friday, the People’s Bank of China refrained from cutting interest rates on one-year monetary policy loans that are provided to commercial banks, disappointing analysts who had expected a rate cut, as only 6 of 22 economists surveyed by Bloomberg had expected before The announcement that interest rates will remain stable, while the majority expects a decrease of 5-10 basis points.
Pessimism about the economic prospects has prevailed in recent weeks, due to the shutdowns in some of the regions most brimming with wealth and industrial activity in China, as the technology center in Shenzhen closed in March for seven days, followed by the end of the month, the imposition of severe restrictions on Shanghai residents. of 25 million.
Economists expect growth to slow to 5% in 2022, down from the government’s target of around 5.5%.
Chinese commercial banks have had a margin of freedom to set their own interest rates, since the central bank abolished direct control in 2005.
Nevertheless, the People’s Bank of China retains significant influence by setting maximum and minimum interest rates through the Interest Rate Self-Discipline Mechanism.
The basic interest rate on one-year deposits in the country for individual deposits is currently 1.5%, and if the banks comply with the cuts, this will be the first reduction in the interest rate on deposits since June of last year.