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Why did China, Europe cut interest rates simultaneously?

(People's Daily Online)

17:05, July 09, 2012

The People's Bank of China announced on the night of July 5 that the benchmark yuan deposit and loan interest rate will be cut since July 6, 2012. Almost at the same time, the European Central Bank also announced the reduction of interest rate.

Reduction of interest rates in succession will have a superimposed effect

On June 8, 2012, the People's Bank of China cut the interests rate for the first time since three and a half years and it again announced to reduce it on July 5, which is the first time for Chinese central bank to carry out an asymmetric reduction of interest rates.

Remarkably, the European Central Bank also announced to cut interest rate of 25 basis points to 0.75 percent in less than an hour after the Chinese central bank announced the news. It was the third reduction of interest rates since Mario Draghi was elected the president of European Central Bank and it also is the lowest benchmark interest rate in the history of the European Central Bank.

Why the two central banks simultaneously announced the reduction of the interest rates?

Sun Lijian, vice president of the School of Economics under the Fudan University, said that this is a coordinated reduction between Chinese central bank and its European counterpart. It is obvious that a superimposed effect caused by simultaneous reduction will have a positive impact on the world and plays a great role in stimulating the international market.

However, in the opinion of Xie Taifeng, dean of the School of Finance under the Capital University of Economics and Business, China's reduction of interest rate is based on both China's economic growth situation and the external economic environment and is a comprehensive consideration.

Ba Shusong, deputy director of the Financial Research Institute under the Development Research Center of the State Council, said that recently the major economic entities, whether they are the developed economic entities or the developing economic entities, have an economic growth weaker than expected. The synchronous weakening made these central banks return to the slack policy. It can be said that China's central bank's reduction of interest rate was launched in the global backdrop.

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