(Bloomberg) -- China’s central bank said it’s studying a plan to narrow the range within which short-term interest rates can fluctuate, extending an overhaul of its policy toolkit that aims to guide the market more effectively.
The People’s Bank of China is considering how to “reasonably” narrow the corridor, according to a quarterly monetary policy report published Friday. A tighter band would help the PBOC steer market rates so they fluctuate around a level it targets.
The PBOC last month introduced a new mechanism aimed at narrowing the rate corridor by preparing to conduct overnight bond repurchase or reverse repo operations. Though it has yet to use the tool, such a move would narrow China’s rate corridor from about 230 basis points to 70 basis points, according to economist estimates.
The central bank also used the report on Friday to sound warnings about the risks of what it considers a bond-market bubble, after an unprecedented rally sent yields so low that they could endanger financial stability and pressure the yuan.
Some wealth management products — especially those based on bonds — have achieved better returns due to their leverage, the PBOC said. It said the approach carries a lot of interest rate risk and can lead to losses if yields rise sharply.
China’s sovereign debt surged this year on the back of the country’s gloomy economic outlook and expectations for rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has fanned demand.
Separately, the PBOC reaffirmed a pledge to make a mild rebound in inflation an important policy consideration, and to keep consumer prices at a reasonable level.
In a special section analyzing the policies of other central banks, the PBOC said market expectations are on the rise that the US Federal Reserve will cut rates.
That could lead to volatility in global financial markets, and such swings have already taken place recently, it said. China will continue to focus on its own agenda in making monetary policy decisions, according to the PBOC.
--With assistance from Danny Lee.
(Updates with background starting in third paragraph.)
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