China announces surprise rate cuts amid economic downshift

BEIJING - The People's Bank of China (PBOC), the central bank, announced Thursday it would cut the benchmark interest rate for one-year deposits by 25 basis points on Friday, stepping up China's stimulus measures to spur its slowing economy.

The benchmark one-year lending rate will also be lowered by 31 basis points on Friday, the PBOC said in a statement on its website.

It is the second time China's central bank has cut the benchmark rates this year after a 25-basis-point cut in interest rates on June 7.

The PBOC said in the statement that it will allow banks to offer 30 percent discount to borrowers, larger than the previous 20 percent, but the lower limit of the floating band of mortgage loan interests will remain unchanged.

"Banking institutions should continue to strictly implement the differentiated housing loans policy and continue to curb speculative home purchases," the PBOC said in the statement.

After the latest cut, the one-year deposit interest rate will fall to 3 percent while the one-year loan interest rate will be lowered to 6 percent.

The upper limit of the floating band of deposit rates was previously adjusted to 1.1 times the benchmark.

The surprise rate cuts came at a time when many economists fear the world's second-largest economy will slow further in the second quarter.

The latest rate cut took analysts by surprise as the PBOC was expected to cut the banks' reserve requirement ratio (RRR) this month, and an interest rate cut is viewed to be more forceful than an RRR adjustment.

"It was asymmetric cuts in borrowing and lending rates again," said Li Xunlei, chief economist for Haitong Securities, in his flash comments on his microblog. "The PBOC aims to stimulate domestic consumption while transferring the banks' profits to the real economy."

"I believe policymakers have more room in loosening monetary policy than fiscal policy," he said.

"The rate cuts (this year) came a little bit earlier than what the market expected," said Li Huiyong, chief macroeconomic analyst for Shenyin & Wanguo Securities. "I think a declining inflation level gives more room for lowering the interest rates and it reflects that economic growth is not looking that good in the second quarter."

China's gross domestic product slowed to a nearly three-year low of 8.1 percent in the first quarter and key economic indicators for June continue to suggest downward risks.

The National Bureau of Statistics has yet to release a string of economic data, including the GDP, for the second quarter and the consumer price index, next week.