Beijing cuts rates as Fed waits
China's central bank surprised global markets yesterday by cutting interest rates for the first time since 2008, a clear signal of its determination to stimulate the second-largest economy.
China's economic growth slowed to 8.1 per cent in the first quarter, down from 9.2 per cent in 2011 and 10.4 per cent in 2010, and recent data showed the economy was on track for an even sharper deceleration. "Cutting the interest rate definitely shows that they are concerned about downside risks to the economy," said Ken Peng, an economist with BNP Paribas.
The unexpected 25 basis point cut in the benchmark one-year lending rate, to 6.31 per cent, added fuel to the recent rally in financial markets, with investors hopeful that China would boost the flagging global economy.
"I was surprised, but it's very positive," said Kristoffer Stensrud, an emerging markets fund manager at Skagen in Norway. "The Chinese authorities have been slightly worried about Europe of late ...but they're taking responsibility for the global economy."
The FTSE Eurofirst 300 index of Europe's biggest listed companies rose for a third day running, it's longest streak of gains in over a month, as investors pulled money out of haven assets such as Bunds and gilts.
The People's Bank of China's move follows rate cuts elsewhere in the world, from Australia to Brazil, as central banks have braced themselves for turmoil emanating from Europe. While the European Central Bank and the Bank of England kept rates on hold this week and did not signal any unorthodox monetary policies to support growth - such as bond purchases - both stressed that they remained ready to act if necessary.
"It's clear that policy makers have their finger on the trigger," said Francis Yared, a bond strategist at Deutsche Bank.
Other investors urged caution.
"Most investors are still on the sidelines and liquidity is very low," said Mark Tinker, a global portfolio manager at Axa Investment Management. The PBoC, which raised interest rates three times last year, had previously characterised its monetary stance this year as "fine tuning", arguing that nothing dramatic was needed to support the economy. "[The rate cut] indicates that the [central bank] has formally entered into a stage of policy easing from that of policy fine-tuning," said Liu Ligang, chief China economist at ANZ.
Inflation was stubbornly high in China last year but has slipped back towards 3 per cent, giving the central bank more scope to ease rates.
In addition to the rate cut, the PBoC said it would allow banks to offer lending rates 20 per cent below the official benchmark. They will also have the freedom to set deposit rates 10 per cent above the official level.
"This is not just about stimulating the economy. It's also about liberalising interest rates," Mr Peng said. "It shows that the political will for financial reform is strong."
China growth dilemma, Page 2 Losing support, Page 4 Jin Liqun and Keyu Jin, Page 9 Lex, Page 12 QE hopes over dollar, Page 21 Blog: www.ft.com/bb 6.31% The benchmark one-year lending rate after a 25 basis point cut
China Global markets shocked after first reduction since 2008