China springs surprise rate cut

The new rate of 6.31 per cent is effective from June 8, the People’s Bank of China (PBOC) said.

The PBOC also cut deposit rates by 25 basis points to 3.25 per cent.

The consensus view of economists had been that the PBOC would refrain from an outright cut to interest rates in 2012 and instead cut the required reserve ratio (RRR) of the country’s banks to boost credit creation and deliver money supply growth in line with the 14 per cent official target.

“This is very positive for risk appetite and is indicative PBOC are there to support the Chinese economy. If anything I am surprised the moves so far look quite muted,” said Michael Sneyd, a currency strategist at BNP Paribas.

“We would expect to see more investors put on risk positions,” he said.

The PBOC has cut RRR for the biggest banks by 150 basis points from a record high of 21.5 per cent in three moves since November last year, after a two-year tightening campaign to rein in inflation and cool steaming economic growth.

The last change to the borrowing rate was in July 2011 when the one-year benchmark lending rate was raised by 25 bps to 6.56 per cent.

However, China is now on track to deliver its weakest quarter of growth in three years in the second quarter.