The encyclopedia · Finance & Accounting · Financial decision · 2013–2015
China built an interest-rate corridor with SLF as its ceiling
After the 2013 cash crunch, the PBOC cast its Standing Lending Facility as the ceiling of an interest-rate corridor to tame money-market swings.
People's Bank of China
the move
China's money market had been volatile since 2013, and the PBOC's benchmark rates were losing their grip as liberalization removed the caps that once tied commercial bank rates to official policy rates.
In November 2015 the PBOC cut Standing Lending Facility rates — overnight to 2.75 percent from 4.5 percent, seven-day to 3.25 percent from 5.5 percent — and announced the move would 'facilitate the role of SLF interest rates in forming the ceiling of an interest rate corridor.'
The corridor design is standard central-bank machinery: when liquidity is tight, short-term money-market rates move toward the upper end as banks borrow from the central bank; when cash is abundant, the lower end guides policy. By setting the top of the corridor, the PBOC gave the market a hard bound on short-term rates.
why it works
- The SLF ceiling caps how high money-market rates can spike.
- A corridor guides rates to the policy rate without daily intervention.
- It replaced fading benchmark rates as the transmission mechanism.
- Market participants could price liquidity risk against known bounds.
what transfers
If administered rates no longer transmit policy, build a corridor: a standing facility at the top and a floor at the bottom guide market rates without daily intervention.
what came after
The corridor framework became the backbone of China's monetary operations, later paired with the Medium-term Lending Facility to guide medium- and long-term rates. The 2015 announcement is cited as the point where the PBOC publicly committed to corridor-based, market-oriented rate guidance.
references
- China central bank cuts borrowing costs, eyes market-based rates
- Beijing moves one step closer to rate corridor as PBOC cuts Standing Lending Facility rates
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