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
Chinaâ€™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 toÂ keep interest rates unchangedÂ 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 ofÂ inflation.
â€śThe 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,â€ť Donna Kwok, economist for Greater China told CNBC.
The countryâ€™s official purchasing managers' index last week signaled thatÂ growth was already slowingÂ 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 thereâ€™s more to the â€śrate cut than meets the eye.â€ť 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.
â€śThe 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,â€ť Kwok said in an email.
With Chinaâ€™s first-quarterÂ gross domestic productÂ growth falling to aÂ three-year lowÂ of 8.1 percent, Brown Brothers Harriman said policymakers could follow up with more action to help the economy out of its rough patch.
â€śWe expect a more aggressive easing cycle ahead as we think the downturn is becoming more severe,â€ť the firm wrote in a note to clients Thursday.