After having frequently raised the deposit reserve rate and increasing the interest rate twice this year, the Central Bank has again resorted to using a rarely used means of regulation. On December 26th, the Central Bank announced on its website it was raising the lending (re-lending) and rediscount rate for financial institutions for the first time in two years. The last time the Central Bank took this action was in December 2008.
The Central Bank's website says that the 20-day re-lending rate is raised from 2.79% to 3.25%, the three-month re-lending rate is raised from 3.06% to 3.55%, the six-month re-lending rate is raised from 3.24% to 3.75%, and the one-year re-lending rate is raised 0.52 points to 3.85%. The one year rediscount rate is raised from 1.80% to 2.25%.
Bankers say that raising the rediscount rate will, in theory, reduce the gap between the reduced discount rate and short-term floating capital lending rate, as well as reduce financial institutions' use of short-term capital. Adjusting the rediscount rate can affect commercial banks' cost of capital, making evident the Central Bank's intent to control bank's credit. Financial institutions' total credit usage for the first 11 months of 2010 reached CNY 7.45 trillion, and regulators have repeatedly warned banks to control their lending impulses.
