China Cuts Rates, Revives Risk Rally

China’s central bank cut benchmark interest rates by 25 basis points on Thursday in a surprise move to shore up slackening economic growth, its first rate cut since the depths of the 2008/09 financial crisis.

The new rate of 6.31 percent is effective from June 8, the People’s Bank of China (PBOC) said in a brief statement on its website. The PBOC also cut deposit rates by 25 basis points to 3.25 percent.

The consensus view of economists had been that the PBOC would refrain from an outright cut to interest rates in 2012 and instead cut the required reserve ratio (RRR) of the country’s banks to boost credit creation and deliver money supply growth in line with the 14 percent official target.

“This is very positive for risk appetite and is indicative PBOC are there to support the Chinese economy. If anything I am surprised the moves so far look quite muted,” said Michael Sneyd, a currency strategist at BNP Paribas.

“We would expect to see more investors put on risk positions,” he said.

The PBOC has cut RRR for the biggest banks by 150 basis points from a record high of 21.5 percent in three moves since November last year, after a two-year tightening campaign to rein in inflation and cool steaming economic growth.

The last change to the borrowing rate was in July 2011 when the 1-year benchmark lending rate was raised by 25 bps to 6.56 percent.

However, China is now on track to deliver its weakest quarter of growth in three years in the second quarter.

The market consensus in a benchmark Reuters poll last month was for annual growth to drop to 7.9 percent, which would mark the sixth straight quarter of softening.

They expected growth for 2012 to slide to 8.2 percent, the smallest expansion in the emerging market giant since 1999 but still above a government target of 7.5 percent.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell