The People’s Bank of China (PBOC) has cut the interest rate by 25 bps in a surprise move for the first time in 4 years. Though the rate cut is not large, the timing was a surprise and the action indicates that the Chinese central bank is ready to act to prevent a much feared hard landing of the Chinese economy. The Chinese economy has faced the maximum impact from the ongoing slowdown in demand from the Euro region because the European Union (EU) is China’s single largest customer, and weak demand from EU has led to worries about the knock-on effect to domestic consumption if industrial activity loses steam dramatically.
The Chinese central bank has been cutting the reserve ratios for banks in 2012 and the interest rate cut may only mark the beginning of series of easing measures as inflation has slowed down to near 3% and with the economy expected to register a much below trend GDP growth of 8.2% in FY12. This weekend shall see release of inflation data and industrial output for the month of May. While industrial output is expected to rise by 9.8% (slowest in three years), inflation is expected to moderate to 3.2% in May’12 after a 3.4% rise in April 2012.