China Cuts Interest Rates For First Time Since 2012

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China's central bank on Friday unexpectedly cut its key interest rates for the first time in more than two years in a bid to boost sagging growth momentum.

The People's Bank of China reduced the one-year lending rate by 40 basis points to 5.6 percent. The one-year deposit rate was cut by 25 basis points to 2.75 percent. The new rates are effective tomorrow, the bank said in a statement on its website.

The surprise rate cut, which was the first reduction since July 2012, comes as the world's second largest economy is forecast to log its weakest growth in nearly 25 years.

"While it was clear that there was a slight easing bias in monetary policy in China the interest rate cut was nonetheless a bit of a surprise," Danske Bank Senior Analyst Flemming Nielsen said.

"It suggests that China now has a more substantial easing bias in monetary policy and the government's attempt to contain credit growth will be loosened a bit in the coming months. Hence, supporting growth now appears to have a higher priority."

The PBoC also asked banks to pay depositors up to 1.2 times the benchmark level, raising it from 1.1 times earlier.

Recent economic data have signaled slowdown in several sections of the Chinese economy. Manufacturing growth eased to a six-month low in November, according to the results of purchasing managers' survey by Markit Economics.

"As such, the impact on GDP growth will be small. The main effect will be to improve the financial position of large firms," Capital Economics Chief Asia Economist Mark Williams said.

"At the same time, the wide net interest margins enjoyed by banks will be squeezed."

Lending eased and property prices declined in October, while bad loans increased sharply in the third quarter. Weaker data had raised calls for more stimulus from many quarters including the State Council.

The central bank thus far favored liquidity injections and targeted reserve requirement reductions and measures for specific financial institutions and sectors.

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