Economic Observer Online
June 8, 2012
By Chen Huijin (陈慧晶 )
Translated by Zhu Na
Original article: [Chinese]

China’s central bank, the People's Bank of China, on Thursday cut benchmark interest rates for the first time since 2008, after many economists reduced their growth forecasts for 2012 to reflect weaker exports to Europe and lower-than-expected industrial production and new loans.

The benchmark one-year deposit rate was reduced by 0.25 percentage points, and the benchmark one-year lending rate was lowered by 0.25 percentage points.

The People’s Bank also gave the country’s other banks more leeway in setting rates – they can pay depositors 1.1 times than the benchmark rate and lend cash out as cheaply as 0.8 times the benchmark rate.

The bank’s announcement lifted global stock markets – when the Economic Observer published its story, the Dow Jones index was up 2.37 percent and the Nasdaq Composite Index was trading 2.40 percent higher.

Commodity indexes also posted gains – aluminum was up 2.16 percent on the London Metals Exchange, and on the New York Mercantile Exchange light crude oil was up 0.69 percent.

After the adjustment, the one-year deposit rate will be 3.25 percent, and the one-year lending rate will be 6.31 percent.

The National Bureau of Statistics is due to release a raft of economic indicators over the weekend, including inflation statistics for May.

The consumer price index grew by 3.2 percent in April, and unless the growth accelerated in May the central bank’s move on Thursday means that banks will still be offering positive real interest rates – a change from the status quo in recent years, when Chinese have seen inflation erode the value of their savings.

Previously a term deposit of 100,000 yuan could earn annual interest of 3,500 yuan. After the interest rate cut, the payment will be 3,250 yuan.

Fu Peng (付鹏), an analyst at Galaxy Futures, said the central bank’s action showed that the economy has slowed faster than expected with greater pressure coming from the deteriorating external environment.

He added that the pervious minor policy adjustments have been inadequate to bolster growth and that the monetary policy action, although not the best method, demonstrates the government’s concern.

 
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