Sunday, May 10, 2015

China cuts rate 25 bps, downward pressure on economy

    China's central bank cut its benchmark interest rate by a further 25 basis points, as expected, to help boost the economy that is still facing "greater downward pressure" while the overall level of inflation remains low and real interest rates are higher than the historical average.
    The People's Bank of China (PBOC) cut its one-year lending rate to 5.1 percent from 5.35 percent while the one-year deposit rate was cut to 2.25 percent from 2.50 percent.
    The PBOC has now cut its lending rate by 50 basis points this year, following a 25 basis point cut on Feb. 28, and expectations that the central bank would cut rates again rose on Saturday when consumer inflation in April rose less than expected at 1.5 percent and producer prices fell for the 37th consecutive month, illustrating the excess supply among the country's manufacturers.
    Continuing its efforts to liberalize China's financial sector, the central bank again lifted the ceiling on much banks can offer in deposit rates to 1.5 times the benchmark rate from 1.3 times.
    The central bank's governor, Zhou Xiaochuan, has on several occasions this year said it is highly probable that China will fully liberalize its interest mechanism this year.
   The PBOC said it would continue to "implement prudent monetary policy," a phrase the bank and Chinese government have used for many months to describe its policy stance. 
    In addition to lowering its benchmark lending rate four times by a total of 90 basis points since November 2014, the PBOC has also cut its reserve requirement twice this year and five times in the last six months to help banks boost lending and stimulate economic activity.
    China's Gross Domestic Product expanded by only 1.3 percent in the first quarter from the fourth quarter for annual growth of 7.0 percent - a six-year low but in line with the government's target - down from 7.3 percent in the fourth quarter.


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