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China cuts interest rates for 3rd time in six months

Latest cut comes days after weaker than expected April data, as Beijing acts to halt slowdown
Monday, May 11, 2015 - 05:50
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Some analysts have said recently that the PBOC had fallen behind the curve by not responding strongly enough.

Beijing

CHINA cut interest rates for the third time in six months on Sunday in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

The People's Bank of China (PBOC) said on its website it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 per cent from May 11. It cut the benchmark deposit rate by the same amount to 2.25 per cent. "China's economy is still facing relatively big downward pressure," the central bank said in a separate statement. "At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average," it said.

Sunday's rate cut came just days after weaker-than-expected April trade and inflation data, highlighting that the world's second-largest economy is under persistent pressure from softness in both external and domestic demand.

Economists had said it was not a matter of if, but when China eased policy again after economic growth in the first quarter cooled to 7 per cent, a level not seen since the depths of the 2008/09 global financial crisis.

Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.

With China set to publish more key economic data on Wednesday, including industrial output and investment, the timing of the rate cut could add to worries that figures may disappoint across the board again, as they did in March.

For now, however, some were confident that policymakers can arrest the slide. "Intensified policy loosening will help effectively halt the economic slowdown," said Xu Hongcai, a senior economist at China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

In a sign that authorities want to press on with reforms, the central bank also took a big step in freeing up the interest rate market by lifting the ceiling for deposit rates to 1.5 times of the benchmark level.

That was the biggest increase in the ceiling since reforms started in 2012.

A cooling property market and slackening growth in manufacturing and investment have weighed on the Chinese economy.

Annual growth is widely forecast to sag to 7 per cent this year, down from 7.4 per cent in 2014.

In an attempt to energise activity, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.

This is partly because despite the steady drumroll of policy easing, there are indications it has not benefited the real economy. Some data suggests banks are not passing on lower interest rates to borrowers, and credit is still not flowing into sectors that are in need of funds.

"The effectiveness of the rate cut won't be very big," said Li Qilin, an economist at Minsheng Securities. "The PBOC has already cut benchmark interest rate by a total of 65 basis points, but borrowing costs have only fallen marginally."

Government economists told Reuters earlier this month that authorities may increase state spending in coming months to shore up growth, in the hope that fiscal policy would work where monetary policy hasn't.

But Li Huiyong, an economist at Shenwan Hongyuan Securities, cautioned against thinking that lower borrowing costs would not trickle down to businesses and consumers at some point. "Don't underestimate the cumulative effect of the cuts in interest rates and RRR," Mr Li said.

"This won't be the last cut. The rate could be lowered to 2 per cent at least, and we expect the economy to gradually stabilise in the coming two quarters," he said. REUTERS