Central Bank to Further Lower Benchmark Deposit and Lending Rates

Central Bank to Further Lower Benchmark Deposit and Lending RatesThe central bank announced that it is planning to lower the benchmark deposit and lending rates by 25 basis points in hopes to further ease companies debt burdens and possibly curb expanding downward risks. Once adjusted the one year deposit rate for financial institutions fell by 1.75 percent and lending rate also dropped to its record low of 4.6 percent. This will be the fifth drop in interest rates since November as the last one was done also by 25 basis points last June.

The central bank also slashed the amount of money that banks can hold or reserve requirement ratio by 50 basis points for all financial institutions to ensure sufficient liquidity in the banking sector and maintain a stable growth in credit. This measure is to offset outflows that have increased since the third quarter.

Chief economist Ma Jun, for the central bank research bureau stated that the cut in interest rates and reserve ratio helps stabilize the expectations but will not change the prudent monetary policy. Meanwhile chief economist for China International Capital Corp. Liang Hong said that intensified deflationary pressure is the main factor behind the cuts and even with these cuts the interest rate still higher than those of other world major economies. Liang believes that the low inflation will provide more room for policy fine tuning.

Weaker than expected economic indicators showed that the country’s economic growth momentum will resume its downtrend after a short term rebound. Chinese stocks still continues its turbulence with a benchmark Shanghai Composite index that sunk further by 7.6 percent or below the 3,000 level.

The weaker-than-expected economic indicators since July showed that the country’s economic growth momentum has resumed its downtrend after a short-term rebound in May and June. To support agricultural activities and small businesses, the central bank will allow an extra 50 basis points reserve ratio cut for rural financial institutions this including non county level rural commercial banks and rural credit cooperatives.

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