Bank of China

Second interest rate cut in month

PUBLISHED : Friday, 06 July, 2012, 12:00am
UPDATED : Friday, 06 July, 2012, 12:00am

China made a surprise move yesterday to cut interest rates for the second time in a month. At the same time, the European Central Bank cut interest rates to a historic low and the Bank of England took steps to further ease credit.

While the moves by the three central banks don't appear to have been co-ordinated, they come as economies around the world remain weak, and ahead of a strategic dialogue between the EU and China next week.

The People's Bank of China cut the 12-month lending rate by 31 basis points to 6 per cent. The rate for one-year deposits will fall by 25 basis points to 3 per cent. The cuts are effective today.

Earlier this month, the PBOC cut rates for the first time since 2008 to spur a flagging economy. Both the lending and deposit rates were cut by 25 basis points. Beijing also granted banks more flexibility to set their rates to boost loan demand.

The ECB cut rates below 1 per cent for the first time, to 0.75 per cent. Meanwhile, the Bank of England will inject ?50 billion (HK$606 billion) into the financial system to haul Britain's economy out of recession.

European Central Bank President Mario Draghi said that 'some of the previously identified downside risks to the euro area growth outlook have materialised', but that the global economy is not worse than when the global financial crisis broke out in 2008.

In Beijing, the Foreign Ministry announced that Catherine Ashton, EU high representative for foreign affairs and a European Commission vice-president, would begin a three-day visit to China on Sunday and attend the third round of the China-EU high-level strategic dialogue.

'China has entered into an interest rate cut cycle,' said Raymond Yeung, an economist at ANZ Bank, adding that the PBOC 'could still have room to lower rates further if it keeps inflation in check'.

The PBOC's cut adds to fears that economic data for June and for the second quarter, to be issued next week, will be weaker than expected.

Market reaction was mixed. London's FTSE 100 ended a day of choppy trading with a slight gain of 0.14 per cent at 5,692.63 points. Frankfurt's DAX 30 index posted a loss of 0.45 per cent to 6,535.56 points and in Paris the CAC 40 was down by 1.17 per cent at 3,229.36. In midday trading in New York, the Dow Jones Industrial Average was down 0.19 per cent at 12,918.88 points.

Lu Ting, China economist for Bank of America-Merrill Lynch, said the biggest beneficiaries of the latest PBOC measures are large, highly leveraged state-owned enterprises and indebted local governments.

The PBOC measures will squeeze profit margins at mainland banks, while they may not necessarily spur loan demand, said Stanley Li, an analyst at Mirae Asset Securities.

But other analysts said the measures could also help ease asset-quality deterioration among the mainland banks as borrowers refinance old debt with cheaper new loans.