InvestmentsAug 25 2015

China’s central bank steps in with interest rate cut

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China’s central bank steps in with interest rate cut

China’s central bank cut interest rates on Tuesday and said it would pump liquidity into the banking sector as plummeting share prices startled investors.

After the market closed on Tuesday, The People’s Bank of China said it had reduced its benchmark one-year lending rate by 25 basis points to 4.6 per cent with immediate effect.

The PBoC’s actions helped support the positive sentiment which emerged earlier in the day in Europe. In the US, the S&P 500 opened 2 per cent higher following a 4 per cent decline on Monday.

China’s domestic market, meanwhile, has now suffered two days of drastic declines. The Shanghai Composite index fell 7.6 per cent on Tuesday, deepening the 8.5 per cent loss sustained on Monday.

The bank also cut the one-year savings rate 25 basis points to 1.75 per cent and said it would lower the reserve requirement ratio for large banks by 50 basis points to 18 per cent from September 6.

This move is aimed at injecting liquidity into the banking sector, which has become reluctant to lend.

The bank said financial markets had “recently displayed relatively large fluctuations”. This had meant “there is a need for more flexible use of monetary policy tools and for the creation of a monetary policy environment that is more conducive to economic restructuring”.

Anna Stupnytska, global economist at Fidelity Worldwide Investments, said while the interest rate cut was a “step in the right direction” and “might help sentiment”, it will not be enough to reverse the ongoing slowdown.

She said: “Some stabilisation in activity is probably the best case scenario. A sharp rebound is unlikely.”