What Is a Floating Interest Rate?

Floating interest rates are interest rates that can be adjusted periodically during the borrowing period. It is often calculated using a basic interest rate bonus. Generally, the loan interest rate or commercial paper interest rate of the company with the best reputation in the market is set as the basic interest rate, and 0.5 to 2 percentage points are added as the floating interest rate. The principal is repaid at face value at maturity, and the interest is usually paid at a floating interest rate in a prescribed interest period. ^[1]

Floating rate

Divided according to whether the interest rate level changes during the duration of the currency loan relationship, interest rates can be divided into fixed interest rates and floating interest rates.

Floating interest rate refers to the interest rate that is adjusted corresponding to changes in prices or other factors during the borrowing period. Both borrowers and lenders may adjust the prescribed interest rate when the signing of the loan agreement with factors such as prices or other market interest rates. Floating interest rates can avoid some of the disadvantages of fixed interest rates, but the calculation basis is diverse and the procedures are complicated.

The method that China once implemented to implement medium- and long-term savings deposits is a form of floating interest rate.

Interest rates can be adjusted at any time according to changes in market interest rates. It is often calculated using a basic interest rate bonus. Generally, the loan interest rate or commercial paper interest rate of the company with the best reputation in the market is set as the basic interest rate, and 0.5 to 2 percentage points are added as the floating interest rate. The principal is repaid at face value at maturity, and floating interest rates are usually used to pay interest in accordance with the prescribed interest payment period. ^[2]

As required by financial institutions such as banks

The People's Bank of China has decided to reduce the benchmark interest rates for RMB loans and deposits of financial institutions from October 24, 2015 to further reduce social financing costs. Among them, the benchmark one-year loan interest rate of financial institutions was reduced by 0.25 percentage points to 4.35%; the benchmark one-year deposit interest rate was reduced by 0.25 percentage points to 1.5%; other benchmark loans and deposit interest rates, and the People's Bank of China s lending rates for financial institutions were adjusted accordingly. ; The personal housing provident fund loan interest rate remains unchanged. At the same time, it will no longer set a floating upper limit on deposit interest rates for commercial banks and rural cooperative financial institutions, and step up efforts to improve the market-oriented formation and regulation mechanism of interest rates, strengthen the central bank's regulation and supervision of the interest rate system, and improve the efficiency of monetary policy transmission.

Since the same day, the RMB deposit reserve ratio of financial institutions has been reduced by 0.5 percentage points to maintain a reasonable and adequate liquidity in the banking system and to guide the steady and moderate growth of money and credit. At the same time, in order to increase financial support for the positive incentives of agriculture, rural areas, farmers, and farmers and small and micro enterprises, the deposit reserve ratio for financial institutions that meet the standards was additionally reduced by 0.5 percentage points.

Attached Table: Benchmark Interest Rate Adjustment for RMB Deposits and Loans of Financial Institutions

Benchmark interest rate adjustments for RMB deposits and loans of financial institutions

	unit:%
	Adjusted interest rate
I. Deposits of urban and rural residents and units
(1) Current deposit	0.35
(2) Full deposit and withdrawal
Three months	1.10
Half a year	1.30
One year	1.50
Two years	2.10
Three years	2.75
Second, various loans
Within one year (including one year)	4.35
One to five years (including five years)	4.75
More than five years	4.90
Personal housing provident fund loan
Less than five years (including five years)	2.75
More than five years	3.25

1. The interest rate adjustment can timely reflect the supply and demand of funds in the capital market;

2. The risk of interest rate changes borne by both borrowers and lenders is small;

3. It helps financial institutions to adjust asset and liability scales and corporate financing decisions in a timely manner based on changes in market interest rates;

4. It helps the central bank to understand the effects of monetary policy in time and make corresponding policy adjustments.