Saturday, February 28, 2015

China cuts rate 25 bps after inflation falls to historic lows

     China's central bank cut its benchmark lending and deposit rates by a further 25 basis points to counter the dampening impact on economic activity from the rise in real interest rates after economic restructuring and the sharp fall in international commodity prices pushed down consumer price inflation to what it described as "historic lows".
     The People's Bank of China (PBOC), which last cut its lending rate by 40 basis points on Nov. 22, 2014, cut the one-year lending rate to 5.35 percent from 5.60 percent while the one-year deposit rate was cut to 2.5 percent from 2.75 percent.
    In addition, the PBOC continued the process of allowing prices to become more market-oriented by raising the maximum that financial institutions can offer for deposits to 1.3 times the benchmark deposit rate from 1.2 times. In November the PBOC raised the limit from a previous 1.1 times.
    The central bank described the higher deposit rate limit as an "important step" in its market-oriented reform the would help expand the floating range of interest rates on deposits, allow financial institutions further room to set their prices independently, improve the level of financial services along and improve the role of market interest rates in allocating resources.
    China's consumer price inflation rate fell to 0.8 percent in January from 1.5 percent in December. The last time China's inflation rate was that low was in November 2009 when inflation rose to 0.6 percent and then 1.9 percent the following month after nine months of steady deflation.
    The larger-than-expected fall in consumer price inflation, along with an annual 4.3 percent fall in January producer prices that illustrates overcapacity among China's factories, fueled expectations that the PBOC would cut its rates.
     On Feb. 10 the bank made it clear that was ready to fight any further economic weakening due to weakening external demand.
    China's Gross Domestic Product expanded by only 1.5 percent in the fourth quarter of 2014 from the third quarter for annual growth of 7.3 percent. Full-year 2014 growth was 7.4 percent, down from 2013's 7.8 percent, below the government's 7.5 percent target and the weakest growth in 24 years.
    On Feb. 4 the PBOC cut its reserve requirement on big banks by 50 basis points to 19.50 percent, freeing up 600 billion yuan that was held as reserves, and economists are looking for further cuts.



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