November 20, 2024
China’s central bank, the People’s Bank of China (PBOC), has announced that it will waive its loan prime rate (LPRs) were unchanged on Friday. One year and five year LPR were 3.10% and 3.60% respectively.
Market response
At the time of writing, AUD/USD is holding lows near 0.6535, up 0.05% on the day.
Central Bank Frequently Asked Questions
Central banks have a core mandate to ensure that there is price stability in a country or region. Economies experience persistent inflation or deflation when prices of certain goods and services fluctuate. Constantly increasing prices of the same goods means inflation, constantly decreasing prices of the same goods means deflation. It is the central bank’s job to adjust the demand by changing the policy rate. The mandate for the largest central banks such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE) is to keep inflation close to 2%.
A central bank has one important tool for raising or lowering inflation, and that is its benchmark policy rate, commonly known as the interest rate. In the pre-contact moment, the central bank will issue a statement with its policy rate and provide additional rationale as to why it is remaining unchanged or changing (cutting or hiking). Local banks will adjust their savings and loan rates accordingly, making it harder or easier for people to earn from their savings or for companies to borrow and invest in their businesses. When the central bank raises interest rates significantly, it is called monetary tightening. When it cuts its benchmark rate, it is called monetary easing.
A central bank is often politically independent. The members of the central bank policy board go through a series of panels and hearings before being appointed to the policy board seat. Each member of that board often has a specific conviction about how the central bank should control inflation and subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap credit, to stimulate the economy significantly and are content to see inflation slightly above 2%, are called ‘doves’. Members who would rather see higher rates to reward savings and always keep a light on inflation are called ‘hawks’ and won’t rest until inflation is at or just below 2%.
Usually, there is a chairman or president who presides over each meeting, has to forge a consensus among the hawks or doves and has the final say when it comes down to a split vote to adjust current policy to avoid a 50-50 tie. The chairman will give speeches which can often be followed directly, where the current financial position and outlook are being communicated. A central bank will try to conduct its monetary policy without making violent changes in rates, equities or its currency. All members of the central bank will express their stance towards the markets before the policy meeting event. Until the new policy is announced a few days before a policy meeting, members are prohibited from speaking publicly. This is called blackout period.
