China surprised the world last night by cutting its benchmark interest rates for the second time in two months.The European Central Bank, meanwhile, cut its refinancing rate by 25 basis points to a record low of 0.75 percent, as expected.
The People's Bank of China decided to cut its one-year benchmark deposit rate by 25 basis points and trimmed the one-year loan rate by 31 basis points, effective today. This is the first asymmetric rate cut in almost four years since September 2008 when the global financial tsunami hit.
This means that all rate cuts since then has seen the benchmark lending and deposit rates be reduced by the same proportion. Following yesterday's cuts, China's benchmark one-year deposit rate stands at 3 percent while its loan rate is now at 6 percent.
"Rate cuts are more effective in fueling the domestic economy than reducing the banks' reserve requirement," said Guo Tianyong, research head at the Central University of Finance and Economics. "The domestic market liquidity has improved after PBoC's conducted four reverse repurchase agreements this year."
On Wednesday, the communist party's mouthpiece the People's Daily urged the central bank to trim the RRR by one to three times during this year.
