THE central bank is studying the potential impact on banks’ loan pricing as it looks to the use of market-based interest rates to replace traditional benchmark interest rates to steer monetary policy, Reuters quoted sources as saying Tuesday.

The comments came amid growing speculation over whether the People’s Bank of China will cut interest rates soon to support the slowing economy, and which of its many rates it may choose to lower first.

The central bank has pledged to gradually unify two interest rate “tracks” — its market-based rates that have been developed in recent years and its benchmark bank deposit and lending rates.

The sources said the central bank is assessing the impact on banks’ credit and loan pricing if it replaces the benchmark lending rate with the loan prime rate (LPR) and replaces the benchmark deposit rate with the seven-day interbank pledged repo rate.

The LPR is an interest rate that commercial banks charge their best clients. The one-year LPR currently stands at 4.31 percent, versus benchmark one-year lending rate of 4.35 percent. The sources did not give a time frame.

Premier Li Keqiang said at the opening session of parliament last week that China will deepen interest rate reforms and lower real interest rates, without giving details.

Central bank Governor Yi Gang said Sunday that there is still some room for cutting the amount of cash that commercial banks need to set aside as reserves, although there is less room than a few years ago.

Other sources said previously that the central bank is not ready to cut benchmark rates just yet to spur flagging growth, but is likely to cut market-based rates, alongside further reductions in banks’ reserve requirement ratios (RRR).

A benchmark rate cut would quickly lower companies’ borrowing costs nationwide, regardless of their size, helping policymakers in their goal of directing more support to small, private firms.

But some analysts say such an aggressive move could also been seen as a setback in long-promised reforms to allow market forces to determine the cost of capital in China, which is key to producing more sustainable and higher quality growth and reducing inefficient investment.

An across-the-board cut in borrowing costs could also risk another flareup in debt and speculative activity like that which followed huge stimulus programs in the past.

The central bank has not cut benchmark rates since the last downturn in 2015.

But it has cut reserve requirements five times in the past year to spur lending to smaller businesses, with more expected in coming quarters, and it has been guiding money market rates lower to reduce financing costs.

The RRR for all banks at big banks is now at 13.5 percent and the ratio for small to medium-sized banks is at 11.5 percent. Yi said the weighted average RRR for all banks is at 11 percent.

(SD-Agencies)