Thursday, October 30, 2008

China drops rates again to stimulate its economy

Business report / October 30, 2008

Beijing and Tokyo - China cut interest rates for the third time in two months yesterday to stimulate growth as the global financial crisis undermines the world's fourth-largest economy.

The key one-year lending rate would fall to 6.66 percent from 6.93 percent with effect from today, the People's Bank of China said on its website. The deposit rate would drop to 3.6 percent from 3.87 percent.

Falling demand for exports and a sagging property market threaten to trigger a slump after growth cooled in the third quarter to the slowest pace in five years.

"China's growth has maintained good momentum, but the global financial crisis is adding more uncertainties," President Hu Jintao said last week.

Meanwhile, the Bank of Japan (BOJ) will consider cutting rates for the first time in seven years this week, when it assesses the impact of the global storm on Japan's brittle economy, according to a source with knowledge of the matter.

The BOJ would monitor global markets before deciding whether to pull the trigger tomorrow, the source said, speaking on condition of anonymity. The source did not comment on the size of any cut.

The Nikkei business daily reported, without citing its sources, that the BOJ was leaning towards a cut of 25 basis points to its benchmark, the unsecured overnight call money rate, which is now 0.5 percent.

With its rates so low, the BOJ has been reluctant to join a global push to ease monetary policy, preferring to keep its powder dry for an emergency in the domestic economy, which was largely shielded from the initial waves of the crisis.

"I think it is getting difficult for the BOJ to distance itself from the international co-ordination," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities. "The BOJ will have to cut interest rates now that markets are expecting it. The bank will have no other choice."

Expectations of a rate cut pushed the Nikkei share index 7.7 percent higher yesterday. The index had fallen to a 26-year low this week.

Comments from Japanese policy makers have begun to suggest that the kind of domestic economic crisis the central bank was waiting for might be at hand. "There is a risk that global market and economic conditions could worsen further and affect Japan's economy," BOJ deputy governor Kiyohiko Nishimura told a parliamentary panel yesterday.