The decision of the People's Bank of China to raise the benchmark lending and deposit interest rates, lift the ceiling of RMB loan interest rates, and allow a downward movement of RMB deposit interest rates takes effect from October 29. The expectation of the hike has long been there. But the news came as a surprise because of the central bank's caution against possible leakage of the information before its official announcement. In an interview with People's Daily, an official with PBOC explained the incentives that have justified the central bank's moves.

The official said that the macro-control mix with economic, legal and administrative ingredients adopted by the central government has reaped good results and the macro-economy and finance were on the way toward what has been expected. The PBOC, under the approval of the State Council, decided to raise the RMB benchmark interest rates to solve the existing problems identified in the current economic and financial operation and consolidate the achievements of the macro-control adjustment.

The central bank believes the interest rate rise will have the economic measures play a bigger role in leveraging the resources and the national economy. It also helps to undermine enterprises' motivations of overstocking fund and easing the tight liquidity of some businesses. It can lead to more rational economic structure, better economic benefit and a sustainable, fast, harmonious and healthy development of the national economy.

The higher deposit interest rate would bring more income to residents, the official said. The upward adjustment for medium and long term deposit bolder than that for the short-tem credit secures the returns for holders of medium and long term savings accounts.

The housing mortgage rates have notched higher not so aggressively as the benchmark rate for loans. Thus, the official asserted, the real estate sector would enjoy a balanced demand and supply and sound development on one hand, and the interests of buyers with mortgage payment for their houses are taken care of on the other.

The official further illustrated the underlying logics for the central bank loosening the control on the maximum rate that commercial banks can decide for loans. Without a ceiling of the interest rate for loans, the official recognized, financial institutes can adjust their interest rate according to the risks which in turn would give a push-start to small and medium enterprises and ease the unemployment pressure. This is possible when financial institutions improve their management system of the interest rates for loans, sharpen their ability of pricing, and have risk management regimes in place.

However, given the fact that the environment for financial competition for urban and rural credit institutions needs improving, the ceiling will remain for some time. The highest point which is allowed to touch is 2.3 times as much as the benchmark rate of loans.

By People's Daily Online