Instant View - China unexpectedly cuts interest rates


  • World
  • Thursday, 07 Jun 2012

(Reuters) - China's central bank cut benchmark interest rates by 25 basis points in a surprise move on Thursday to shore up slackening economic growth, its first rate cut since the depths of the 2008/09 financial crisis.

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.

Following are the latest analyst comments:

ANNE-LAURE TREMBLAY, ANALYST, BNP PARIBAS

"Gold is one of the commodities most sensitive to changes in monetary policy. The PBOC's move towards a more accommodative stance should support the metal's price. We expect other central banks to follow suit. More particularly, the ECB will likely cut its refinancing rate next month."

Earlier comments:

PETER CARDILLO, CHIEF MARKET ECONOMIST, ROCKWELL GLOBAL CAPITAL, NEW YORK

"It was a surprise it happened today but not entirely unexpected. It's more indication that interest rates are crumbling around the world, which should help stabilize economic activity going forward and should be positive for equities.

"The move... certainly indicates economies have slowed but cheaper money should help stabilize the global economy."

DAVID GOVETT, HEAD OF PRECIOUS METALS, MAREX SPECTRON

"The knee-jerk reaction (for gold) is higher as we have seen as the dollar falls and people react to the concept of cheaper money in China. (That) in turn should stimulate the economy, which is of course good for commodities, especially metals.

However, we know that China is a massive consumer of gold already and (the) cut in the base rate whilst positive is not going to massively increase the purchasing of gold overnight."

MICHAEL DERKS, CHIEF STRATEGIST, FXPRO, LONDON

"Conscious that their economy has lost considerable momentum in the first half of this year, Chinese policy officials are stepping up the pace in terms of easing financial conditions.

"Today's 25 basis point cut in the benchmark deposit and lending rate is the first for four years, and reflects Beijing's increased confidence that inflationary pressures are easing.

"China always had a great deal more policy weapons in their armoury than other major advanced economies, and they are now deploying them. We can expect further initiatives over coming months. For risk assets, the preparedness of the world's second largest economy to roll out further stimulus is encouraging."

MARC OSTWALD, RATE STRATEGIST, MONUMENT SECURITIES, LONDON

"Overall in the current environment where there's some hope related to Europe, renewed dovish talk from the FOMC hinting at perhaps more measures from them and the Chinese rate cut puts us in a risk-on day. But one has to be a little bit careful because underlying all of this are very thin volumes.

"It will be construed positively particularly in close alignment with what we've seen. So it's now down to what happens with and what we hear from (Fed chief) Bernanke this afternoon."

ADRIAN SCHMIDT, CURRENCY STRATEGIST, LLOYDS, LONDON "The China decision has had a very modest positive impact on risk positive currencies, though not much of a sustained impact. The concern is that with industrial production and CPI data coming out of China at the weekend that it's indicative of them knowing something about weak data going forward. But for the moment it's being seen as stimulative and risk-positive".

KEITH BOWMAN, EQUITY ANALYST AT HARGREAVES LANSDOWN, LONDON

"A cut of 25 basis points is not massive by any means, but it does assist and signals that central banks are there and looking to support the economy when needed.

"China's move should help support the stocks rally that we have seen in the market over the past days. Investors will also look for hints later in the day for any stimulus from the U.S. Federal Reserve. But the whole European scenario still overhangs. "

QINWEI WANG, ECONOMIST, CAPITAL ECONOMICS IN LONDON

"It's obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand.

"The deposit rate was allowed to be 110 percent higher than the benchmark. It's a significant move and China is further easing control on deposit rates. It's a first step in rate liberalisation and it increases the returns for households. The lower floor for lending rates creates more competition between banks. So banks cannot guarantee their profits as before."

MICHAEL SNEYD, CURRENCY STRATEGIST, BNP PARIBAS:

"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.

"We would expect to see more investors put on risk positions and see a trend higher in the Australian and Canadian dollars, while the euro should also continue to benefit."

STEWART RICHARDSON, CIO AT RMG WEALTH

"It's more the timing that was a surprise than anything else. Everyone understands China is broadly in easing mode, as the economic data has been disappointing of late. A lot of people thought there'd be a rate cut of some magnitude this year."

(London Treasury Desk +44 207 542 4441)

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