PBOC cut interest rates for second time in four weeks
July 9, 2012 Category Finance, Weekly
The People’s Bank of China (PBOC) cut interest rates for the second time in just four weeks. The surprise reduction is sure to stoke fears that China’s second-quarter economic growth rate – due to be announced this week – will be even weaker than the 7.5% or so that analysts were expecting. The benchmark one-year savings rate fell by 0.25 percentage points to 3%, while the key lending rate was cut by a slightly larger 0.31 percentage points to 6%. On top of that, the central bank said that from now on banks would be allowed to make loans at rates as low as 70% of the benchmark lending rate. As a result, the minimum one-year lending rate has been reduced to just 4.2%, from 5.9% at the beginning of June. The margin between what banks pay on their deposits and what they get on their loans has now fallen by half to just 1.2 percentage points. In the near term that’s bound to hurt the share prices of China’s main banks, which have already fallen heavily since early April, when Premier Wen Jiabao signaled a tougher policy stance towards the banking sector, declaring “our banks are profiting too easily”. The asymmetric interest rate cut is expected to make little difference to banks’ margins, however. A couple of years ago, Chinese banks typically made two-thirds of all their loans either at or slightly below the benchmark lending rate, but now banks only make a third of their loans at or below the benchmark rate. Two-thirds are made at interest rates above the benchmark. Some analysts say the latest interest rate cut may do little or nothing to boost China’s economic growth rate. Many economist say this month’s action won’t be enough, and the central bank will be forced to cut rates at least two more times this year, as well as further relax the reserve requirement ratio (RRR). Both measures effectively free up credit in the financial system so banks can grant more loans.
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