China cuts interest rates to address sluggish growth

China hopes to revive its economy, growing at the slowest pace since 2009.

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By :  ,  Financial Analyst

The People's Bank of China has decided today (November 21st) to reduce its one year deposit rate from three per cent to 2.75 per cent in a bid to revive the country's economy. In addition, the one-year lending rate will be reduced from six per cent to 5.6 per cent. The unexpected cuts come into effect tomorrow.

The move comes after new figures revealed that China's factory output has contracted for the first time in six months and economic growth slowed to 7.3 per cent last quarter, the slowest pace since 2009.

The property market also remained weak, affecting the broader economy as it lowered demand for goods such as furniture and materials such as cement and steel.

The bank said it would give banks the flexibility to offer higher deposit rates, up to 1.2 times the benchmark level instead 1.1 times, to offset the effect of lower rates on savers.

The cut – the first in over two years – was not expected by investors: "It's a surprise, another Friday night special," Mark Williams, chief Asia economist with Capital Economics in London, told CNBC. "It may not have a major impact on GDP growth—that depends on if policymakers also allow the rate of credit growth to pick up."

The move comes amid wide expectations that the world’s second economy could miss its annual growth target—set this year at about 7.5 per cent—for the first time since the late 1990s.

It follows the trend of central banks across the world to ease monetary policy in a bid to fight off the growing threat of deflation.

European stock markets surged on the news, with the German DAX index soaring two per cent and the FTSE 100 rising one per cent.

Find up to date information on the FTSE 100 and spread betting strategies at City Index.

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