China cuts interest rates to bolster real economy

The central bank cut interest rates for the third time in six months on Sunday to ward off the continuing downward pressure on economic growth.

The People's Bank of China said on its website that it will lower its benchmark one-year lending rate by 25 basis points to 5.1 percent from Monday. The benchmark deposit rate will be cut by the same amount to 2.25 percent.

The interest rate cuts are to be accompanied by deposit rate liberalization. The upper limit of the floating band of deposit rates for financial institutions is being increased to 1.5 times the benchmark from the previous 1.3 percent, a move toward the completely free rate that has been promised before the end of the year by the central bank's governor.

The lending rate cut is intended to drive down financing costs and support the development of the real economy, according to a statement on the bank's website.

"Currently, the pace of domestic economic restructuring is quickening and the fluctuation of external demand is relatively big. China's economy is still facing relatively big downward pressure," the statement said.

Li Daokui, deputy head of the School of Economics and Management at Tsinghua University, said, "This 25 basis points cut is a cautious monetary policy adjustment.

"It is intended to lower the relatively high real interest rates and decrease financial costs for the industrial economy."

The cut will have a limited effect on its own, but will support proactive fiscal policies such as the recent increase in local government bond issuance.

"These combined measures will soon take effect in boosting economic growth, and a rebound may be seen in one or two months," Li said.

The bank's statement said it will maintain "prudent monetary policy", but stressed that the policy will be adjusted according to changes in liquidity, prices and economic conditions.

"Liquidity in the banking system is generally adequate and market interest rates are falling, providing a good window to open up the upper limit for deposit rates," it said.

A research note from Standard Chartered Bank said, "China is far from deploying unconventional tools now to boost its economy, although there is a risk that GDP growth may slow to below 7 percent in the second quarter."

It predicted there may be another 100 basis points cut in the reserve requirement ratio in the second half of the year.