China Slashes Interest Rates, First Time Since '08

Posted by - Thursday, June 7th, 2012

Europe's financial crisis has generated a debilitating butterfly effect on the economy, extending all across the globe. News reports prove that the ripples have officially extended eastward all the way to China.

Earlier this week, we reported that China was diligently preparing for a Greece euro exit and today's news shows just how committed they are to boosting their own domestic economy in lieu of the the crisis in Europe.

This morning, Bloomberg reported that China's central bank has announced plans to cut interest rates for the first time since 2008 in order to more adequately combat the economic slowdown as a result of Europe's fiscal problems.

According to one Hong Kong-based economist with Mizuho Securities Asia Ltd., Shen Jianguang, this rate-cut isn't expected to be a one-time thing either. He anticipates a full-blown rate cut cycle to ensue in the months, and perhaps years, to come as a result of the global economic slowdown. Before 2012 draws to an end, he says China will cut rates again at least one more time.

Weak economic data and sharp declines in inflation are the major warning signs that sent China to take such drastic action so quickly as an inflation report is to be released in two days. All sources point to a weaker economy than Chinese government officials anticipated.

This policy will go into effect tomorrow and the benchmark one-year lending rate will drop down .25 percent; from 6.56 percent down to 6.31 percent. The People's Bank of China also indicated the the one-year deposit rate will decline by .25 percent as well; falling from 3.5 percent to 2.35 percent. Banks will now have the freedom “to set the amounts they pay on deposits and charge for loans” in this “milestone” transition.

According to three bank officials in China, the nation's biggest banks may fall short of loan targets for the first time in seven years due to a major decrease in the demand for credit. Additionally, sales in China are slacking and their industrial output rose at the slowest pace in three years time. Both manufacturing and inflation rates have slowed down and experts suspect that the government will respond with a stimulus package of to two trillion yuan to “cushion” the impact of the global economic crisis...

Timothy Bisberger, managing director at BNP Paribas and former assistant secretary for financial markets at the U.S. Treasury reports on what China's interest rate cuts really means in terms of our global economy in this Bloomberg video below...

 

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