People’s Bank of China Finally Cuts Interest Rates — Timing of First Cut Since December 2008 Is a Surprise

June 7, 2012

Monetary easing has intensified in China ahead of a 10-year shift of political leadership and amid mounting concern about the slowing economy.  Forthcoming economic data are likely to showcase weakness.  Beginning in November 2011 and most recently in April of this year, officials had three times reduced reserve requirement ratios by 50 basis points apiece, but they had resisted any reduction of the key lending and deposit rates.  The lack of rate cuts contrasted with the autumn of 2008, when five reductions in the space of three months depressed those interest rates to 5.31% and 2.25% from prior peaks of 7.47% and 4.14%.  The lending and deposit rates subsequently were lifted by 25 bps each in October and December 2010 and February, April and July 2011.  That last tightening left the rate levels at 6.56% and 3.50%.

Today’s action reverses the tightening of July 6, 2011, returning the lending rate to 6.31% and the deposit rate to 3.25%.  Equally important, a liberalization of commercial bank discretion in setting its rate boundaries relative to the central bank benchmarks has been announced.  This change will generate more competition among banks and cheaper financing costs for ultimate borrowers.  Reserve requirements were not changed further, but today’s initiatives seemingly foreshadow additional interest rate reductions later this year.  Coming just days after the G7 conference call and a day following the ECB’s hint of a rate cut in Euroland next month, it appears that a choreographed effort to boost global financial market confidence is afoot.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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