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CHINA CUTS INTEREST RATES TO BOOST ECONOMY

Written by  Published in Asia Monday, 11 May 2015 10:22
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Kathmandu, May 11 (CNS) -- China's central bank has announced an interest rates cut effective Monday, the third rate cut since November last year, to bolster the real economy.

The People's Bank of China (PBOC) said here Sunday it would cut the benchmark deposit and loan interest rates by 25 basis points (bps) each. After the reduction, the one-year deposit rate will stand at 2.25 per cent, and the one-year lending rate at 5.1 per cent.

This is the third round of rate cuts by the PBOC following one in November 2014 and another in March 2015.

The latest cuts will lower funding costs to facilitate healthy development of the real economy and ensure a modest monetary environment amid the ongoing strategy of national economic restructuring, the PBOC said.

Ma Jun, chief economist with the research bureau of the PBOC, said the interest rate cuts should not be interpreted as the Chinese version of quantitative easing (QE), the type of monetary policy used by central banks, in particular the United States Federal reserve, to stimulate the economy when standard monetary policy has become ineffective following the global financial crisis of 2007-2008.

MA said that QE, adopted in some developed countries, was a set of unconventional policy measures when the policy rates were close to zero and the real economy faced recession, but this was not what was happening in China as the central bank still had many conventional tools to pump liquidity.

China's economy now faces grave downward pressure and it is necessary to cut actual interest rates and stabilize investment growth through reducing nominal interest rates. If nominal interest rates were not cut while inflation was dropping, real interest rates will climb with risks of passive contraction in monetary conditions, Ma added.

The cut was in line with market expectation of pro-growth monetary measures after a string of indicators, including manufacturing activity and foreign trade, suggested the world's second largest economy confronted a rocky ride on its reform drive.

Given looming downward pressure and deflationary risks, the cut, a wise move, responds to the economic circumstance and will serve as a boon to lowering financing costs, said Qu Hongbin, chief economist for China at HSBC.

In order to further boost interest rate liberalization, the central bank also decided to adjust the upper limit of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times. This is another key move for deposit interest rate reforms, paving the way for the ultimate lifting of ceiling control on deposit interest rates, said the PBOC.

The move can widen the pricing freedom of the financial institutions and improve their independent capacities in fixing prices, said the PBOC, which noted that while economic reform accelerated, China still faced relatively high downward pressure as external demand continued to fluctuate.

China's economy, under the "new normal" of slower but higher quality growth, expanded 7.0 per cent in the first quarter from a year earlier, the lowest quarterly growth posted since 2009.

Besides the rate cuts, the central bank also slashed the reserve requirement ratio in February and again in April to alleviate the financing burden on enterprises and bolster the economy.China's low inflationary level and high real interest rates provide ample room to adopt such tools, the PBOC said.

The PBOC said it would continue to implement prudent monetary policies and make moderate adjustments based on changes in liquidity, inflation and economic situation, striking a policy balance between economic restructuring and growth. --XINHUA

 

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