China cut borrowing costs for the first time since 2008 and loosened controls on banks’ lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe’s debt crisis threatens global growth.
The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks will get extra freedom to set the amounts they pay on deposits and charge for loans in a move UBS AG calls a “milestone.”
European stocks and U.S. index futures extended gains as China’s move added to an Australian rate cut this week and expressions of concern from European and U.S. central bank officials that fanned expectations for more stimulus. The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.
“This will be the beginning of a rate cut cycle and there will be at least one more reduction this year,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. “The data to be released over the weekend must be very weak and inflation must have eased sharply.”
The MSCI All-Country World Index added 0.9 percent at 8:31 a.m. in New York. The Stoxx Europe 600 Index jumped 1.4 percent, extending yesterday’s biggest rally in six months, while Standard & Poor’s 500 Index futures advanced 0.8 percent. Oil gained 1.4 percent in New York, reversing a 0.6 percent drop.
Banks can offer a 20 percent discount to the benchmark lending rate, the PBOC said, up from a previous 10 percent. Lenders will for the first time be able to offer savers deposit rates that are up to 10 percent higher than the official benchmark rate.
Wang Tao, chief China economist at UBS in Hong Kong, who previously worked at the International Monetary Fund, described the deposit-ceiling move as “unprecedented” and a “milestone for interest-rate liberalization.”
U.S. Treasury Secretary Timothy F. Geithner has pressed China on the deposit-rate ceiling, calling as recently as April 26 for an increase to help give savers higher returns and stoke consumer spending. The practice of keeping the deposit rate below the pace of inflation had forced households to “save excessively,” he said in a speech in San Francisco.
The central bank last reduced benchmark interest rates in late 2008, when the government unveiled a 4 trillion yuan ($586 billion at the time) stimulus package to counter the effects of the global financial crisis. Interest rates have been unchanged since an increase in July 2011.
Australia’s central bank cut interest rates two days ago, citing Europe’s crisis and moderating growth in China. The European Central Bank yesterday held its key rate at a record low, with President Mario Draghi saying that officials stand ready to act. Today the Bank of England kept its benchmark at a record low, while refraining from expanding a stimulus program.
In the U.S., Federal Reserve Vice Chairman Janet Yellen said yesterday that the U.S. economy “remains vulnerable to setbacks” and may warrant additional monetary stimulus. Dennis Lockhart, president of the Fed’s Atlanta bank, said extending Operation Twist, a policy of buying longer-term bonds, is an “option on the table.”
In China, today’s move signals policy makers’ concern at weakness in demand for loans. Three bank officials told Bloomberg News last month that the nation’s biggest banks may fall short of loan targets for the first time in at least seven years as demand for credit wanes.
Caterpillar Inc., the world’s largest maker of construction and mining equipment, says sales in China have lagged behind expectations, leading to a build-up of inventory.
Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a National Bureau of Statistics report due June 9.
Inflation may have moderated to 3.2 percent in May from a year earlier after a 3.4 percent rate in April, a separate survey showed, the fourth month consumer prices have risen by less than the government’s 2012 target of 4 percent.
China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.
The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.
Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after April industrial production, new loans and exports were less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.
Expansion may drop to 7 percent or “slightly below” this quarter from a year earlier, Tao Dong, a Hong Kong-based economist with Credit Suisse Group AG said last month. Ding Shuang, a Hong Kong-based economist at Citigroup Inc., forecast 7.5 percent. That follows an 8.1 percent expansion in the first three months of the year, the fifth quarterly deceleration.
Tao said the government may respond with a stimulus of as much as 2 trillion yuan, half the size of a package announced in late 2008 to cushion the economy from the impact of the global financial crisis.
Even so, the official Xinhua News Agency said in a May 29 article that the government has no intention of rolling out another “massive” stimulus, damping speculation of more aggressive policies to support growth.
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