Skip to footer

China's interest rate cut hints at sharper downturn

China's surprise cut suggests its economy or its inflation is slowing faster than expected. Rate cut includes a doubling of discount rate, encouraging banks to lend.

|
Soo Hoo Zheyang/Reuters/File
China's nation flag flies in front of the headquarters of the People's Bank of China, the nation's central bank, in Beijing in this November file photo. China's central bank cut benchmark interest rates by 25 basis points on June 7, 2012, in a surprise move to shore up slackening economic growth.

China’s surprise 25 basis point cut in benchmark lending rates on Thursday caught economists and the markets by surprise, and could signal the economy is slowing faster than previously thought.

Most analysts had expected China to keep interest rates unchanged and to cut the reserve requirement ratio (RRR) for banks instead, thus allowing them to lend more of their deposits. But the interest rate cut suggests industrial production data for the month of May, due on Saturday local time, will show a further deterioration in growth and an easing of inflation.

“The timing of tonight's rate cut suggests two things. Either inflation has eased to less than 3 percent already, or, growth is slowing sharply faster than policymakers' previous expectations,” Donna Kwok, economist for Greater China told CNBC.

The country’s official purchasing managers' index last week signaled that growth was already slowing last month, while the HSBC PMI, which tracks small and medium sized firms fell to 48.4 from 49.3 in April. That was the seventh straight month the number had been below the 50-mark that demarcates expansion from contraction.

Kwok says there’s more to the “rate cut than meets the eye.” The discount that banks will be allowed to offer on lending rates, relative to the benchmark, has been more than doubled, she said. China strictly controls the interest rate at which banks can lend money and pay depositors.

“The discount that banks were previously allowed to offer on lending rates relative to the benchmark rate has been doubled, from 10 percent to 20 percent, which means that the lowest official lending rate has effectively been cut by 63 basis points, not just 25 basis points,” Kwok said in an email.

With China’s first-quarter gross domestic product growth falling to a three-year low of 8.1 percent, Brown Brothers Harriman said policymakers could follow up with more action to help the economy out of its rough patch.

“We expect a more aggressive easing cycle ahead as we think the downturn is becoming more severe,” the firm wrote in a note to clients Thursday.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to China's interest rate cut hints at sharper downturn
Read this article in
https://www.csmonitor.com/Business/Latest-News-Wires/2012/0607/China-s-interest-rate-cut-hints-at-sharper-downturn
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe