Stimulus boost by China's central bank through key rate cut | WPN World People News

BEIJING Striving to give faltering the economy a boost, China's central bank Thursday not just cut borrowing cost, the first since December 2008, but also gave banks additional flexibility to set competitive lending and deposit rates in what is seen as a move towards liberalization.

The People's Bank of China (PBOC), the central bank, announced a 25 basis point cut in the benchmark interest rate for deposits to 3.25 per cent and one-year loan interest rate to 6.31 per cent beginning Friday.

The cut in the benchmark rates comes after five hikes in rates to drain excess liquidity.

The upper limit of the floating band of deposit rates will be adjusted to 1.1 times the benchmark while banks are allowed to offer 20 per cent discount to borrowers.

The central bank move came as China's GDP slowed to a nearly three-year low of 8.1 per cent in the first quarter and key economic indicators for April continue to suggest downward risks.

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

While the cut to borrowing costs is expected to help Chinese economy get back on growth track, it has come as a surprise to many experts particularly the move towards liberalization.

The PBOC said it was giving banks the freedom from June 8 to set deposit rates as high as 110 per cent of the benchmark rate and offer rates on new loans for as little as 80 per cent of official policy rates, an additional 10 percentage points from the current 90 per cent limit.

The PBOC Thursday also sold repurchase agreements worth 20 billion yuan (about $3.16 billion), injecting 2 billion yuan of liquidity into the money market this week after hedging funds due in the open market.

The move, which ended a three-week net liquidity tightening in the market, left analysts speculating that policymakers are considering a monetary loosening by cutting the interest rate to spur a slowing economy.

"With the inflation level declining, I think policymakers will let the door of monetary easing open wider in the future, as domestic and external demands are still sluggish while the economy continues to slow," said Chen Ying, a fixed-income analyst with Sealand Securities, reported Xinhua.

Through its open market operations, the PBOC drained 44 billion yuan of liquidity from banks last month after it released about 420 billion yuan of liquidity into the banking system by lowering banks' reserve requirement ratio by 50 basis points on May 18.

Short-term borrowing costs between Chinese banks rose higher in the country's money market on Thursday, as suggested by interbank market yields.

The overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost of interbank borrowing as a key barometer of liquidity, rose 19.91 basis points to 2.4008 per cent.

The one-week Shibor went up 10.83 basis points to 2.675 per cent, while the two-week and one-month Shibors added 1.92 basis points and five basis points, respectively.

Mou Zhiyang, a fixed-income analyst for China Dragon Securities, said he was unsure if the PBOC will cut the interest rate over the weekend.

"It's difficult to speculate on the exact timing of a rate cut, but I'm pretty certain that the central bank will resort to its price tools within this year," Mou said, reported Xinhua.

Source:Asia Pacific News.Net