China surprised markets with interest rate announcements on Thursday, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in a step along the path of liberalization. China’s first rate cut since the global financial crisis in 2008 underlined heightened concern among policymakers worldwide that the euro area’s deepening debt problems are threatening economic growth.
We had alerted yesterday, China may cut the reserve requirement ratio for large banks by 200 basis points to 18% and interest rates by 25 basis points to 6.31%.
The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective today, the People’s Bank of China said on its website yesterday. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks will get extra freedom to set the amounts they pay on deposits and charge for loans. Commercial banks until now have been barred from charging rates on deposits higher than the benchmark set by the central bank. The move confounded the call of many economists who thought the People’s Bank of China (PBOC) would refrain from cutting policy rates this year despite wanting to support growth.
European stocks and U.S. index futures rose as China’s move added to an Australian rate cut this week and expressions of concern from European and U.S. central bank officials that fanned expectations for more stimulus.
The announcement, before China reports inflation, investment and output figures tomorrow, may signal that the economy is weaker than the government expected. In China, the rate move signals policy makers’ concern at weakness in demand for loans.
Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a report due June 9. Inflation may have moderated to 3.2 percent in May from a year earlier after a 3.4 percent rate in April.
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