Surprise Rate Cut in China; What's it Mean?
Courtesy of Mish
China surprised economists today with a surprise cut in interest rates by a quarter point, the first cut in rates since 2008.
Just a couple of months ago, few analysts had forecast that Beijing would cut rates, believing that China was on track for a “soft landing”. But after growth slowed to 8.1 per cent in the first quarter, recent data showed the economy was on track for a sharp deceleration.
With the cut, China’s benchmark one-year lending rate will now be 6.31 per cent, while the one-year deposit rate will be 3.25 per cent.
The People’s Bank of China, which raised interest rates three times last year, had previously characterised its monetary stance this year as “fine tuning”, arguing that nothing dramatic was needed to support the economy. The rate cut marks a definite change.
The question now is whether businesses and households will respond to the lower rates by borrowing more. Banks have reported weak loan demand over the past two months.
In an important move alongside the rate cut, the Chinese central bank said it would allow banks to set deposit rates 10 percent above the benchmark level and to set lending rates 20 per cent below the benchmark.
This is a step towards interest rate liberalisation – that is, letting banks decide for themselves, based on market conditions, the level at which they set rates. Analysts believe this is crucial to putting the economy on a more stable footing by ensuring that households earn a fair return on their bank savings, thus encouraging more income to be used for consumption.
What's it Mean?
The simple explanation is China is slowing far more than the soft-landing crowd expects.
