China’s Rate Cut Signals Weak Q2 GDP Number

This Bystander’s first take on China’s surprise cut in interest rates, its second in barely a month, is that the second-quarter GDP number due to be released next week will be below expectations. The consensus view of private economists is that the economy grew by 7.5% between April and June, down from the first quarter’s 8.1%. That would represent a sixth consecutive quarter of slowing growth, and be the slowest quarter since the immediate aftermath of the 2008 global financial crisis.

The People’s Bank of China has cut its benchmark one-year lending rate by 31 basis points to 6% and the deposit rate by 25 basis points to 3%, both effective from Friday. Banks will also be allowed to increase the discount they can offer on their loan rates to 30% from 20%, a twin effort to stimulate more demand for credit and liberalize interest rates a tad further.

The reduction in consumer price inflation from last year’s peak leaves headroom for more monetary easing, rate cuts and reductions in banks’ capital reserve requirements should the anticipated bottoming out of the growth slowdown not occur during the second half.

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