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Interest rate cut sets table for better H2
By Wang Yanlin |
June 8, 2012, Friday
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Online Edition
Online Edition
CHINA'S May economic performance may be weaker than expected, but analysts said the interest rate cut that takes effect today boosts the likelihood of a better second half.
"It is a bit surprising that the central bank reduced interest rates before the May data is released tomorrow," said Lu Zhengwei, an analyst at Industrial Bank. "It indicates the data may be as disappointing as April, triggering policy makers to act quickly."
Some analysts had forecast China's economy could show signs of stabilizing in May with industrial production recovering slightly, fixed-asset investment largely unchanging and retail sales strengthening by a small margin.
If this scenario is correct, it will be much better than that in April when growth had a free-fall. But the unexpected slash in interest rates indicates uncertainty.
Yesterday evening, the central bank announced the benchmark one-year lending and deposit rates will be cut by a quarter of a percentage point, the first such move since December of 2008.
Also, China gave banks the flexibility to set their own deposit rate by as much as 1.1 times the benchmark, and set the lending rate as low as 80 percent of the benchmark, 10 percentage points lower than previously.
Zhou Hao, an economist at Australia and New Zealand Banking Group Ltd, said: "China has now formally entered a stage of policy easing from that of policy fine-tuning. The rate cut will not only help lower borrowing costs for Chinese firms, but also confirm a stage of outright monetary policy easing that can boost investors' confidence."
Zhou said the cut will likely reduce the interest rate burden of both firms and consumers by roughly 145 billion yuan (US$23 billion).
"Further interest rate cuts will depend on the inflation outlook. At this stage, we expect more reserve requirement ratio cuts will be needed to boost growth," Zhou said.
While some economists expect one more rate cut this year, Nomura Economist Zhang Zhiwei said he does not think there will be any more in 2012.
"The announced interest rate cut and liberalization are already quite strong measures and may affect the banking system negatively," Zhang said. "The central bank is well aware of the potential risks associated with interest rate liberalization, and we expect it to be cautious in the next several months. It will observe closely how banks react to the interest rate liberalization, avoiding adding more pressure to the banking system."
"It is a bit surprising that the central bank reduced interest rates before the May data is released tomorrow," said Lu Zhengwei, an analyst at Industrial Bank. "It indicates the data may be as disappointing as April, triggering policy makers to act quickly."
Some analysts had forecast China's economy could show signs of stabilizing in May with industrial production recovering slightly, fixed-asset investment largely unchanging and retail sales strengthening by a small margin.
If this scenario is correct, it will be much better than that in April when growth had a free-fall. But the unexpected slash in interest rates indicates uncertainty.
Yesterday evening, the central bank announced the benchmark one-year lending and deposit rates will be cut by a quarter of a percentage point, the first such move since December of 2008.
Also, China gave banks the flexibility to set their own deposit rate by as much as 1.1 times the benchmark, and set the lending rate as low as 80 percent of the benchmark, 10 percentage points lower than previously.
Zhou Hao, an economist at Australia and New Zealand Banking Group Ltd, said: "China has now formally entered a stage of policy easing from that of policy fine-tuning. The rate cut will not only help lower borrowing costs for Chinese firms, but also confirm a stage of outright monetary policy easing that can boost investors' confidence."
Zhou said the cut will likely reduce the interest rate burden of both firms and consumers by roughly 145 billion yuan (US$23 billion).
"Further interest rate cuts will depend on the inflation outlook. At this stage, we expect more reserve requirement ratio cuts will be needed to boost growth," Zhou said.
While some economists expect one more rate cut this year, Nomura Economist Zhang Zhiwei said he does not think there will be any more in 2012.
"The announced interest rate cut and liberalization are already quite strong measures and may affect the banking system negatively," Zhang said. "The central bank is well aware of the potential risks associated with interest rate liberalization, and we expect it to be cautious in the next several months. It will observe closely how banks react to the interest rate liberalization, avoiding adding more pressure to the banking system."
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