China surprises with 25 bps interest rate cut

Thu Jun 7, 2012 11:02am EDT
 
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By Kevin Yao and Nick Edwards

BEIJING (Reuters) - China delivered twin surprises on interest rates on Thursday, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in a step along the path of liberalization.

China's first rate cut since the global financial crisis underlined heightened concern among policymakers worldwide that the euro area's deepening debt problems are threatening economic growth.

Global shares rallied to their highest level in more than a week and the euro advanced on hopes that other major central banks would also take measures to shore up growth.

"It's obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand," Qinwei Wang, economist at Capital Economics in London, told Reuters.

The 25 basis points cut brings the official one year borrowing rate to 6.31 percent and the one year deposit rate to 3.25 percent.

The move confounded the call of many economists who thought the People's Bank of China (PBOC) would refrain from cutting policy rates this year despite wanting to support growth.

The European Union is China's single biggest foreign customer and faltering demand there has led to worries about the knock-on effect to domestic consumption if industrial activity slows dramatically.

A sudden collapse in global trade in late 2008 saw an estimated 20 million Chinese jobs axed in a matter of months and prompted Beijing to roll-out a 4 trillion yuan ($635 billion) fiscal stimulus plan to help bolster domestic economic activity.   Continued...

 
China's nation flag flies in front of the headquarters of the People's Bank of China, the central bank, in Beijing November 30, 2011. REUTERS/Soo Hoo Zheyang