China cuts benchmark interest rate for first time since dotcom bust

China's central bank cut the country's benchmark interest rate for the first time in more than six years last night, in the face of global financial turmoil and signs of a slowing domestic economy.
The People's Bank of China lowered the one-year lending rate by 27 basis points, to 7.2 per cent per annum, after years of gradual rises aimed at fighting inflation and reining in what some saw as an overheating economy.
The PBoC also said it would reduce the amount that smaller domestic banks must hold in reserve with the central bank by one percentage point to 16.5 per cent from September 25, freeing up funds for those banks to lend. That will be the first drop in the reserve rate requirement since 1999 but does not extend to the country's five largest banks or the postal bank.
“This is a response to global events and shows policymakers are more worried about the export machine grinding to a halt in the face of global worries,” said Ben Simpfendorfer, chief China economist for RBS.
“But this is probably insurance rather than signalling serious concern over domestic worries and we should not overplay this decision.”
China's consumer price inflation fell to 4.9 per cent last month, its lowest level in 14 months, after peaking at a 12-year high of 8.7 per cent in February.
In announcing the cuts, the central bank did not mention the global credit crisis but said the moves were intended to “solve prominent problems in the current economic operation” and “ensure steady, rapid and sustained development”.
However, Stephen Green, Standard Chartered's head of China research, said: “The timing likely has something to do with the Asian equity market sell-off today [Monday], on the back of the Lehman collapse and fears of more financial contagion in the US.”