China Unexpectedly Cuts Interest Rates, Reserve Ratio

(RTTNews) - China's central bank unexpectedly lowered interest rates and reserve ratio on Friday, in what could be the latest stimulus effort to underpin the economy that is adjusting itself to the 'new normal' of lower growth.

The People's Bank of China cut the one-year lending rate and deposit rate by a quarter-point to 4.35 percent and 1.50 percent, respectively. The new rates will take effect on Saturday.

The latest reduction was the sixth since November last year. Previously, the bank lowered the interest rates in August by 25 basis points.

The renminbi deposit reserve ratio was also cut on Friday, by 50 basis points. Further, the PBoC said the reserve ratio will be by an extra 50 basis points for some banks to boost support for rural and small businesses.

In a statement on its website, the PBoC said the reserve ratio reduction was to maintain reasonably adequate liquidity in the banking system and to guide steady moderate growth of money and credit.

The bank also scrapped the upper limit on the floating interest rates on deposits for commercial banks and rural co-operative financial institutions, its latest move to liberalize deposit rates.

While China's growth eased marginally in the third quarter to 6.9 percent, the economy expanded more-than-expected on the back of strong service sector performance.

The latest figure was only slightly below the government's target of about 7 percent.

"The key point is that we shouldn't take today's [PBoC] announcement as evidence that policymakers have grown more concerned about the economy," Capital Economics economist Mark Williams said.

"Instead, this is a controlled easing cycle that underlines how China's policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre."

In October, the International Monetary Fund retained China's growth projections for this year and the next at 6.8 percent and 6.3 percent, respectively.

Meanwhile, the World Bank expects the Chinese economy to grow about 7 percent this year and cut its forecasts for the next two years. The growth is expected to gradually moderate as the Chinese economy shift toward a model dominated by domestic consumption and services, the lender said.

"We're still waiting for clear evidence of an economic turnaround - September's activity data still don't show any great improvement," Capital Economics' Williams said.

"Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon."