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China cuts interest rates for second time in three months

The People's Bank of China cut interest rates at the weekend for the second time in three months in what the Financial Times reported is an attempt to bolster the slowing Chinese economy and head off the threat of deflation.05 Mar 2015

The bank cut the benchmark one-year lending rate by 25 basis points to 5.35% and the corresponding deposit rate by the same amount, it said in a statement.

The upper limit of the floating range for deposit interest rates was raised from 1.2 to 1.3 times the benchmark level, "in support of market-oriented interest rate reform", the bank said.

Related adjustments have been made to benchmark interest rates on deposits and loans of other maturities, and to deposits and loan interest rates on the personal housing provident fund, it said.

The focus of the interest rate cut is to "keep real interest rate levels suitable for fundamental trends in economic growth, prices and employment. This does not represent a change in the direction of monetary policy," the bank said.

Markets, however, didn't respond as positively as to the previous cut, Reuters said. Where the last interest rate cut saw a 26% rise in Chinese shares over the following month, this weekend's cut only brought small rises in the markets, Reuters said

The cut was less than had been hoped, Reuter said, quoting a Dacheng Fund Management note to its clients: "The timing of the rate cut is within market expectations, but the strength of the cut is slightly less than anticipated".

Some investors had expected a 50 basis point reduction, Reuters said.

Chinese manufacturing figures fell in January for the first time in two years, confirming reports of a slowdown in the economy.

The interest rate move comes days before the annual "two sessions" – the annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference – are due to begin on 3 March, Chinese state-run news agency Xinhua said.