China Cuts Key Lending and Deposit Rates in Effort to Stimulate Spending

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By Lauren Keane
Washington Post Foreign Service
Thursday, November 27, 2008

BEIJING, Nov. 26 -- China's central bank announced its biggest interest rate cut in 11 years Wednesday, highlighting the government's aggressive commitment to shoring up confidence in the fundamentals of the economy three weeks after unveiling a $586 billion stimulus plan.

The People's Bank of China cut its key one-year lending and deposit rates by 108 basis points each, to 5.58 percent and 2.52 percent, respectively. It was the bank's fourth rate cut since September.

The bank also cut the reserve requirement rate, which will allow banks to lend more money at any given time; that rate cut was doubled for smaller banks.

The cuts are aimed "at ensuring sufficient liquidity in the banking system and to promote steady loan growth so that monetary policy can play an active role in supporting economic growth," the bank said in a statement.

The cut in the deposit interest rate in particular should encourage Chinese consumers to spend rather than save, which would be a welcome trend for the Chinese market. Analysts say the country must create significant domestic demand in order to sustain long-term growth. The cut could also help the property market by encouraging people to invest in assets.

Frank Gong, the head of China research and strategy at J.P. Morgan Chase, said in a statement that he expects further rate cuts before the end of the year, most likely in mid-December when the U.S. Federal Reserve Board is expected to cut its own rates again, and significant continued rate cuts throughout 2009 that could bring benchmark rates below 4 percent. He also noted that inflationary pressure should "ease notably" as commodity prices fall.

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