The 0.25% reduction of both the one-year lending and deposit rates took them to 6.31% and 3.25% respectively, effective from today.
In addition, lending and deposit rates of other maturities and individual housing provident fund deposit and lending rates have been lowered accordingly.
"The timing of the rate cut – two days prior to the May macro data release – probably suggests May data could be worse than the market expected. Market reaction today has been muted, even negative. The market appears to have focused on how bad the May data has to be for the People’s Bank of China to front-run the data," said Bill Maldonado, chief investment officer of Asia Pacific at HSBC Global Asset Management.
But he thinks the announcement is positive for markets going forward and it reinforces the firm’s constructive views on equities.
"More proactive policy response should help improve China’s growth prospects," he said.
Charlie Awdry, manager of the Henderson China Opportunities Fund, said the past few months had shown piecemeal action from the Chinese government, in the form of subsidies and cutting the reserved requirement ratios for banks.
"But over the last four weeks we’ve seen a dramatic reduction in inflationary expectations in the Chinese economy with the slower growth, the weaker data and, more recently, the pullback in the oil price.
"This has probably allowed the authorities the extra window to reduce interest rates," Awdry added.
Inflation fall key
Derry Pickford, macro analyst at Ashburton agreed that a fall in inflation was a key catalyst for the rate cut.
"The cut was symmetrical – a lot of the market was talking about a cut to lending but not deposit rates. This suggests a low CPI number this weekend. The inflation rate (3.4% in April) was effectively acting as a constraint on cutting deposit rates as the authorities were reluctant to move back to a negative real deposit rate. We can probably expect an inflation reading sub 3.25%."
Another important development was the decision to widen the band by which lending and deposit rates can be set.
"China has for a long time suffered from a mismatch between loan supply and demand, with banks preferring not to lend to higher risk areas such as SMEs, instead extending loans to cashed up state owned enterprises that do not need these loans.
"Interest rate deregulation will mean risks can be more accurately priced by banks and means that credit can go to areas where it is most needed.
"This illustrates a willingness on the part of the policy makers to break the mould in order to address underlying structural imbalances within the economy and as such we remain sanguine on China’s longer term growth potential," explained Gigi Chan, manager of the Threadneedle China Opportunities Fund.
