China has cut rates again - here's what you need to know

Getty/Shaun Botterill

The Chinese economy is slowing.

In an effort to reverse some of the current economic weakness, the People’s Bank of China announced a 25 basis point (bps) cut in benchmark deposit and lending rates over the weekend. This brings the one-year rate to 2.5% and 5.34% respectively.

This is the second cut in this round of PBOC stimulus and follows the 40 bps cut last November.

The cut came a day before the release of the official PMI stats which showed the manufacturing sector remains in the contraction zone. NBS manufacturing PMI printed 49.9 for February while the non-manufacturing PMI printed a more robust 53.9.

Coming just before the National Peoples Congress, the annual meeting of Chinese politicians, the PBOC move highlights that lawmakers will need to continue to focus on economic growth. The question is whether they will hold to an official 7.5% target or downgrade the official growth goal for the year to 7%.

Explaining the rate cut, the PBOC said:

The focus of the latest adjustment is to keep real interest rate levels accommodative to the changing fundamental trends in growth, inflation and employment.

Phat Dragon, Westpac’s China watcher, put the cut in context of falling inflation in China, noting:

The benchmark 1-year lending rate has come down by 121bps since the rate cycle peak in March 2012 (6.56% to 5.35%), while consumer price inflation has slowed by 480bps since the inflation peak in September 2011. The GDP deflator has come down by 894bps in the same period.

So with just a cumulative 65 basis points of cuts so far, the PBOC has ample room for further easing.

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