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Drastic interest rate cut soon

By Hao Zhou (China Daily)
Updated: 2009-01-10 07:49

China's central bank may slash the benchmark interest rate "radically" in the coming months as the country's inflationary pressure is expected to ease further, economists said.

A report by the Bank of China (BOC) International (China) Ltd said the People's Bank of China may further cut the benchmark one-year deposit rate by 81 basis points and the lending rate by 108 basis points in the coming three to four months.

The report said the nearly zero interest rate and weak market confidence in the US has created pressure on China to further relax its monetary policy to stimulate investment and consumption.

Li Huiyong, senior analyst with Shenyin Wanguo Securities Research Institute, said he expected the interest rate cut to come by the end of this month at the earliest before authorities make more cuts in the coming months. "The sooner the better," he said.

China's year-on-year economic growth eased to 9 percent in the third quarter of 2008 after it expanded by 11.9 percent in 2007. Many economists said the momentum will remain worrisome and growth could dip to as low as below 7 percent in the fourth quarter.

Li forecast China's GDP will grow between 7 and 8 percent this year.

Li, together with other economists, also forecast easing prices this year, which would create more room for interest rate cuts.

He said China's consumer price index (CPI), a key gauge for inflation, will stay at around zero this year.

Ha Jiming, chief economist of the China International Capital Corp Ltd, forecast in a report that China's December producer price index (PPI), a leading indicator that measures factory-gate prices, may drop by 1 to 2 percent year-on-year driven by plummeting raw material prices and producers' overcapacity.

In November, PPI rose by 2 percent year-on-year, down from its peak of 10 percent in July.

Fujian-based Industrial Bank Co Ltd's Chief Economist Lu Zhengwei predicted China's December PPI may decline by 0.3 to 0.5 percent year-on-year and CPI may rise by 1 to 1.4 percent year-on-year in December.

China is expected to release its 2008 macroeconomic figures before the Chinese Lunar New Year, which starts on Jan 26.

Li played down the role of monetary policies in boosting the economy, as weakening confidence has led to unwillingness to invest despite repeated cuts in lending costs.

"The effect (of monetary policies) will be limited," Li said.