The People's Bank of China, China's central bank, announced Thursday that it would raise both lending and deposit interest rates 0.27 percentage points as of October 29.

 

The one-year deposit interest rate will increase from 1.98 percent to 2.25 percent, while the one-year lending interest rate will rise from 5.31 percent to 5.58 percent.

 

The central bank will also allow greater variability in the lending interest rate of RMB -- the Chinese currency -- and allow the RMB deposit interest rate to float downward.

 

According to a press release posted on the central bank's website, deposit and lending interest rates in other categories will also be adjusted accordingly.

 

The adjustment for medium and long-term interest rates will be larger than that for short-term rates, the release said.

 

The central bank will also broaden variability of lending interest rates for financial institutions. It will no longer set a ceiling on rates for financial institutions, excluding credit cooperatives.

 

The increase limit of lending interest rates will still be 0.9 times the benchmark rate.

 

For both urban and rural credit cooperatives the upper limit of their lending interest rate will be 2.3 times the benchmark rate. Their variability in rate reduction will remain unchanged. Taking the one-year lending interest rate of 5.58 percent for example, credit cooperatives could set lending interest rates of between 5.02 percent and 12.83 percent.

 

Allowing the RMB deposit interest rate to float downward means the rate for financial institutions can vary within the range of the deposit benchmark rate.

 

The central bank is adjusting interest rates in an attempt to consolidate the results of the government’s macroeconomic control measures whilst also maintaining the economy’s momentum to create sustained, rapid, coordinated and healthy growth, said a leading official with the central bank.

 

The move will enable market forces to play a bigger role in resource allocation and macroeconomic control, the official said. It is also a significant step to leave interest rates to the marketplace, improving the pricing capability of financial institutions and guarding against financial risk.

 

The official said that the central bank has made "comprehensive and thorough preparations" to ensure smooth implementation of the adjustment.

 

All financial institutions will be required to adopt the adjusted benchmark rate and floating scope, improve relevant risk management and set deposit and lending interest rates in line with their business performance and capital costs.

 

The official advised financial institutions to raise rates cautiously following the adjustment.

 

The central bank will strengthen the monitoring, analysis and management of interest rates, and provide coordination and guidance to institutions on rate adjustment, the official said.

 

There had been calls for an interest rate hike from the beginning of the current round of macroeconomic adjustments -- launched in the spring -- but the government had been cautious, fearing that higher funding costs would hurt sectors that were not overheating.

 

(Xinhua News Agency October 29, 2004)