China slashed interest rates for the third time in six months over the weekend in a bid to boost lending to businesses, adding stimulus to a slowing economy.
The People’s Bank of China on Saturday cut both benchmark lending and deposit rates by 25 basis points to 5.1 percent and 2.25 percent, respectively.
The bank had cut rates previously in March. Prior to that, the bank lowered its lending rate in November for the first time in more than two years.
The latest reduction in interest rates is aimed to ease the funding costs for business to promote economic development as the country continues to face relatively big downward pressure, the PBoC said.
China’s economic growth had eased to 7 percent in the first quarter, the weakest pace in six years, from 7.3 percent in the previous three months.
Capital Economics economist Mark Williams said the cut to benchmark interest rates was not a sign of panic, but a rational response to weaker-than-expected data.
“Policymakers have room to act more forcefully if needed but are choosing to dole out stimulus in a measured way,” Williams said.
The economist expects real interest rates to decline automatically with no further change to benchmark rates. Hence, Williams does not expect further cut in benchmark rates.
That said, Capital Economics expects a further 150 basis point reduction in the reserve requirement ratio before the end of 2015, plus continued direct support for lending in the form of re-lending operations.
The reserve requirement ratio was previously cut by 100 basis points in April, which was the second reduction this year and the biggest since the global financial crisis.
The research group also expects the government to play a part by speeding up spending on infrastructure and other government-led investment.
The PBoC also raised the ceiling on the deposit rate to 1.5 times from 1.3 times, giving more room for banks to set the deposit rates for their clients.
“As the commercial banks’ deposit rates are currently set close to the ceiling, the implication probably is that the drop in commercial banks’ deposit rates will be modest in the wake of the interest rate cut,” Danske Bank Senior Analyst Flemming Nielsen said.
Official data released on Sunday showed that China’s consumer price inflation rose to 1.5 percent in April from 1.4 percent in March. However, it was half of the government’s target of 3 percent.
Producer prices declined for a 38th consecutive month, down 4.6 percent annually in April.
“Consumer price inflation edged up in April and should continue to recover in coming months,” Capital Economics’ economist Julian Evans-Pritchard said.
“This, along with signs that producer price inflation is also beginning to bottom out, should ease concerns over deflation.”
The material has been provided by InstaForex Company – www.instaforex.com