China cuts interest rates by 25 bps to revive economy

In the latest effort to revive its sluggish economy, China on Sunday cut interest rates by 25 basis points, the third intervention by its central bank in six months amid a slowdown in the world’s second largest economy. The People’s Bank of China (PBoC) announced it will cut the benchmark deposit and loan interest rates by 25 basis points (bps) starting May 11. After the cut, the one-year deposit rate will stand at 2.25 per cent, and one-year lending rate at 5.1 per cent, according to the bank.

This is the third round of rate cuts by the PBoC since November, and the latest effort by policy makers to tackle the increasing “downward pressure” on the economy. The rate cut was widely expected following subdued consumer inflation data and a fall in exports, analysts say. The move was in line with market expectation of pro-growth monetary measures after a string of indicators, including manufacturing activity and foreign trade, suggested the economy confronted a rocky ride on its reform drive. The cuts will lower funding costs to facilitate healthy development of the real economy and ensure a modest monetary environment amid the ongoing strategy of national economic restructuring, the bank said.

While economic reform accelerates, China still faces a relatively high “downward pressure” as external demand continues to fluctuate, the PBoC said. The economy expanded 7 per cent in the first quarter this year, the lowest quarterly reading since the 2008 financial crisis. The central bank had slashed the reserve requirement ratio in February and again in April to alleviate the burden on enterprises and bolster the economy.

China’s low inflationary level and high real interest rates provide ample room to adopt such tools, the PBoC said. Given the downward pressure and deflationary risks, the cut responds to economic circumstance and will serve as a boon to lowering financing costs, said Qu Hongbin, chief economist for China at HSBC, state-run Xinhua news agency reported.

The central bank said it would continue to implement prudent monetary policy and make moderate adjustments based on changes in liquidity, inflation and economic situation, striking a policy balance between economic restructuring and growth. It also decided to adjust the upper limit of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times, another step toward liberalising the interest rates mechanism.