People's Bank of China, Will Deposit Interest Rates Be Lowered?

[Asia Economy Beijing=Special Correspondent Park Sun-mi] The People's Bank of China is reportedly considering lowering deposit interest rates, which would help protect bank profitability, in order to encourage bank lending necessary for economic normalization.

According to major foreign media on the 25th (local time), the People's Bank of China is reviewing a deposit interest rate cut and plans to make a decision within a few days. If the People's Bank proceeds with lowering deposit interest rates, it will be the first deposit rate cut since October 2015, when the rate was reduced to 1.5%.

A reduction in deposit interest rates can play a role in encouraging banks to lend more actively to minimize economic damage caused by the spread of COVID-19.

So far, the Chinese government has encouraged banks to increase lending and lower funding costs to support small and medium-sized enterprises and private companies facing financial difficulties, but banks have been hesitant due to concerns over profitability. By lowering deposit interest rates, the interest banks must pay to depositors decreases, increasing the possibility of improved bank profitability.

A source cited by foreign media said, "The deposit interest rate cut is intended to support the banking sector," adding, "It is meant to encourage banks to increase lending through this measure."

If a deposit interest rate cut is decided within a few days, there is also a possibility that the Loan Prime Rate (LPR), which serves as the benchmark interest rate as of the 20th of next month, will be announced to be lowered. The source stated that the deposit rate cut has increased the likelihood of an additional reduction in the Medium-term Lending Facility (MLF) loan rate, which forms the basis for determining the LPR.