China Lowers Interest Rates

China’s central bank cut its benchmark lending rate for the fifth time since November and lowered the amount of cash banks must set aside, stepping up efforts to cushion a stock market rout and deepening economic slowdown.

The one-year lending rate will drop by 25 basis points to 4.6 percent effective Wednesday, the Beijing-based People’s Bank of China said on its website Tuesday. The one-year deposit rate will fall by 25 basis points to 1.75 percent.

The acceleration of monetary easing underscores policy makers’ determination to meet Premier Li Keqiang’s 2015 growth goal of about 7 percent. The risk of capital outflows and tighter liquidity after China devalued its currency on Aug.
11, weaker-than-forecast economic readings, and renewed stock market weakness, added pressure for further stimulus.

“The economy is still under immense downward pressure,” Yao Wei, a Paris-based China economist at Societe Generale SA, wrote before the move. “Fiscal policy has to step up, and monetary policy is likely to play an assisting role by providing targeted liquidity.”

The PBOC on Aug. 11 announced it will allow markets greater say in setting the currency’s level, which spurred the biggest devaluation in two decades and threatens to trigger an outflow of capital. The PBOC has intervened to stem losses after the move.

Deflation risks, over-capacity and a debt overhang remain a cloud over an economy forecast for its slowest expansion since 1990. China’s industrial production, investment and retail data all trailed analysts’ estimates in July.
Before today’s move, central bank Governor Zhou Xiaochuan had already this year lowered the required reserve ratio twice, with an additional move targeted to certain banks. Officials are also acting to boost lending and are expanding lending capacity at the country’s policy banks.

The nation’s industrial production, investment and retail data all trailed analysts’ estimates in July, while exports fell and producer price deflation deepened. Bloomberg’s monthly gross domestic product tracker suggests the economy expanded at a 6.6 percent pace from a year earlier in July.


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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