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China announces surprise rate cuts amid economic downshift

(Xinhua)

08:08, July 06, 2012

BEIJING, July 5 (Xinhua) -- China's central bank on Thursday announced surprise cuts in the benchmark interest rates for the second time this year as the world's second largest economy is expected to slow further in the second quarter.

The People's Bank of China (PBOC) said it will reduce the benchmark interest rate for one-year deposits by 25 basis points and that for one-year lending by 31 basis points on Friday.

The move came less than a month after the previous rate cuts announced on June 7, when the benchmark rates were slashed by 25 basis-points in their first cuts since December 2008.

The central bank also brought down the lower limit for lending rates to float to 70 percent of the benchmark rate from 80 percent announced in June, stepping up its bid to liberalize interest rates.

"The rate cuts (this year) came a little bit earlier than what the market expected," said Li Huiyong, chief macroeconomic analyst for Shenyin & Wanguo Securities.

"I think a declining inflation level gives more room for lowering the interest rates and it reflects that economic growth is not looking that good in the second quarter," he said.

China's gross domestic product (GDP) growth moderated to a nearly a three-year low of 8.1 percent in the first quarter and is widely expected to slow for a sixth straight quarter in April-June.

"With the second rate cuts in less than a month, the central bank fully delivered its intention of maintaining economic growth," said Guo Tianyong, a professor from the Central University of Finance and Economics.

The country's economy will bottom out in the second quarter with a year-on-year growth of 7.5 percent, international investment bank Barclays Capital said in a report Thursday.

The National Bureau of Statistics is expected to release a string of economic data, including the GDP for the second quarter, and the consumer price index (CPI) for June next week.

Guo forecasted that annual CPI growth in June will slow to 2.5 percent after hitting a 17-month low of 3 percent in May.

After the latest cuts, the one-year deposit interest rate will fall to 3 percent while the one-year loan interest rate will be lowered to 6 percent.

Li Xunlei, chief economist for Haitong Securities, said policymakers have more room to loosen monetary policy than fiscal policy this year.

The central bank will cut interest rates at least one more time in the second half and the reserve requirement ratio another two times, he predicted.

China has cut the reserve requirement ratio three times since late last year, demanding commercial banks to keep 20.5 percent of their cash in reserve.

Apart from stimulating credit demand, the central bank also has pushed ahead reform of making interest rates more market-driven by expanding the floating band of lending rates, Guo said.

"It will further narrow the deposit-loan interest rate gap and force banks to concede part of their profits to the real economy," he said.

After the previous interest rate adjustment in June, banks are allowed to adjust the upper limit of the floating band of deposit rates to 1.1 times the benchmark and offer a lending rate discount as much as 20 percent.

However, the PBOC reiterated Thursday the lower limit of the floating band of mortgage loan interests will remain unchanged.

"Banking institutions should continue to strictly implement the differentiated housing loans policy and continue to curb speculative home purchases," the PBOC said in the statement.

Ba Shusong, an economist with the Development Research Center of the State Council, or China's cabinet, said the PBOC's move was taken against a global backdrop of lackluster growth.

"Both developed and developing economies have been weaker than expected recently, prompting central banks to shift to a looser policy," he said.

Also on Thursday, the European Central Bank (ECB) cut its benchmark interest rate by 25 basis points to 0.75 percent, a record low.

Meanwhile, the Bank of England announced Thursday to further inject 50 billion pounds (about 78 billion U.S. dollars) into the economy over the next four months via its quantitative easing (QE) program, increasing Britain's QE size to 375 billion pounds.

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