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March 1, 2015

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Central bank cuts interest rates

CHINA’S central bank yesterday cut interest rates for the second time in three months as inflation cooled and the authorities stepped up stimulus measures to curb the economic slowdown.

From today, the one-year benchmark deposit rate will be cut by 0.25 points to 2.5 percent, while the one-year lending rate will fall 0.25 points to 5.35 percent, the People’s Bank of China said in a statement.

In its latest move to liberate interest rates, the PBOC said banks can offer deposit rates of up to 30 percent above the benchmark, widening the previous permitted margin of 20 percent. Under the new terms, the ceiling on the one-year deposit rate will be 3.25 percent, down from 3.3 percent before the rate cut.

Banks usually offer the ceiling rate on deposits of more than 50,000 yuan (US$8,000).

The reduction in the lending rate will mean lower costs for local businesses, while homeowners with a 20-year, 1 million yuan mortgage will see their repayments fall by about 144 yuan a month.

History suggests the interest rate cut will be good news for the stock market. After the past seven rate cuts since 2008, the benchmark Shanghai Composite Index has risen on four occasions.

The central bank said China’s accelerating economic restructuring and global commodity price slumps have resulted in very low domestic inflation, leaving room for an interest rate cut to lower funding costs and support growth.

The PBOC said it is not relaxing its monetary policies but rather is using monetary tools to keep actual interest rates at a “suitable level” to support economic growth, prices and employment.

The latest reduction — the second since late November — came three weeks after the central bank lowered reserve requirements for banks, freeing up more funds to lend to companies.

Economists said further easing monetary policies to prevent the economy from a protracted slowdown are in the pipeline, and that the timing of the latest move — just before the annual legislature meeting — is a sign of the state’s support for the economy.

China’s annual consumer inflation in January fell to a five-year low of 0.8 percent while factory deflation worsened, underscoring deepening weakness in the economy. Exports fell 17.5 percent from a year ago while imports almost halved, performing worse than expected.

However, the HSBC Flash China Manufacturing Purchasing Managers’ Index, which is geared toward private and export-oriented firms, and which provides the earliest available indicator of China’s industrial performance, was 50.1 last month, up from 49.7 in January, according to HSBC and research firm Markit. Readings above 50 indicate expansion.

The economic data nevertheless added to worries that China is under deflationary pressure that could discourage investment in the long term.

“Deflationary pressure is now a major threat to the Chinese economy and the interest rate cuts could lower funding costs, encourage consumption, and lower the risk of a hard landing,” said Jiang Chao, an analyst of Haitong Securities.

“The central bank might still cut interest rates and banks’ reserve requirements in the future, extending easier monetary policies,” he said.

Minsheng Securities Co said in a note that it expects home sales to stabilize in China’s large cities due to abundant market liquidity and lower mortgage rates.


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