Bloomberg News

Capital Economics Says China Rate Reduction Sooner Than Expected

July 05, 2012

Mark Williams, chief Asia economist at Capital Economics Ltd. in London, comments on China’s second interest-rate cut in a month.

The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective tomorrow, the People’s Bank of China said on its website today. Banks can offer loans of as much as 30 percent less than benchmark rates, the central bank said.

“This is a step beyond what was expected from policy makers. There was widespread anticipation that the reserve ratio would be cut again soon, but most were expecting the next benchmark rate cut to be delayed until the end of July or later.

‘‘The bigger cut to the lending than the savings rate probably doesn’t signal too much. It simply tidies up an anomaly whereby the one-year lending rate was, prior to the move, an ungainly 6.31 percent. The decision to increase the maximum discount allowed is significant. This was only increased from 10 percent a month ago. This will further eat into bank profits but increases the effective amount of policy loosening.

‘‘Finally, the People’s Bank statement, unusually, stresses that banks should continue to implement controls on mortgage lending. Policy makers are trying to tread a thin line of wanting to expand credit while preventing the re-emergence of speculative investment in property.’’

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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