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PBOC cuts interest rates for growth

Update | China's central bank announces long-awaited rate cut to boost economy

Mainland central bank lowers one-year lending and deposit rates, easing liquidity days before the National People's Congress is due to meet

The People's Bank of China has cut benchmark interest rates for the second time in three months, adding to a raft of recent attempts taken to counter an increasing deflation risk and a slowdown in growth.

Effective today, one-year lending and deposit rates would be lowered 25 basis points to 5.35 per cent and 2.5 per cent respectively, the central bank said yesterday. It also lifted the ceiling on the deposit rate to 1.3 times the benchmark, up from 1.2 times.

"The consumer price level is at a historic low, leaving room for further interest rates adjustment," PBOC said. "The rate adjustment is to reinforce the positive results of falling financing costs [from recent action]."

In a surprise move in November, PBOC cut interest rates by 40 basis points for the first time since 2012. Yesterday's decision followed a 0.5 percentage point cut early last month in the bank's reserve requirement ratio (RRR) - the share of deposits it is required to park at the central bank as reserves.

"The rates cut and its timing are within our expectation," ANZ senior economist Raymond Yeung said. "PBOC is feeling the pressure for more monetary easing as deflation risk is rising."

January's consumer price index rose only 0.8 per cent year-on-year, the first time the inflation gauge fell below 1 per cent since late 2009. Producer price index - which reflects selling price changes by producers of goods and services - has recorded negative growth for 34 months.

Yeung expects two more cuts in the reserve ratio, each by 50 basis points, later this year. He said the PBOC's action pattern would be an interest rates cut followed by a reserve ratio cut.

"So the next easing will tackle the reserve ratio, which may be held off until after [this week's National People's Congress] gathering," Yeung said.

Goldman Sachs economist Song Yu said: "Further benchmark interest rate cuts are also possible. The government is also loosening other policies such as allowing the exchange rate to depreciate modestly against the US dollar and stepping up infrastructure investments."

Most analysts expect February's CPI to be below or around 1 per cent. The economy expanded by 7.4 per cent last year, the slowest pace since 1990, and the first time the government target was missed since 1998. But some experts believe the effect of further interest rates cuts is limited.

Lu Zhengwei, chief economist at Shanghai-based Industrial Bank, said the key was to break from the "rigid repayment" tradition that had kept financing costs artificially high.

"The central bank's action is no longer ahead of the market, and rates cuts don't address the real problem. There's no cheap money available no matter how much you cut the lending rates," he said.

This article appeared in the South China Morning Post print edition as: PBOC cuts interest rates for growth
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