China Set to Cut Interest Rates Drastically

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Jan. 12 – China’s central bank could drastically cut the benchmark interest rate soon to ease inflationary pressure, according to a report made by the Bank of China.

It said that the People’s Bank of China may implement further cuts to the benchmark one-year deposit rate by 81 basis points and the lending rate by 108 basis points expected in the next three to four months.

China is being forced to find ways to encourage more investment and consumption because of an almost zero interest rate and the declining U.S. market.

Li Huiyong, senior analyst with Shenyin Wanguo Securities Research Institute, told China Daily that 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.

In the third quarter of 2008, the country’s economic growth slowed to 9 percent compared to 2007’s 11.9 percent. Anything less than 8 percent growth for this year may be prove to be disruptive and instigate social unrest in the country.

Li predicts that China’s consumer price index, an indicator for inflation, will hover at around zero this year.

Ha Jiming, chief economist of the China International Capital Corp Ltd, said a report that China’s December producer price index (PPI) could decline by 1 to 2 percent year-on-year because of plunging raw material prices and overcapacity.

November’s PPI increased by 2 percent year-on-year, a drop from its peak of 10 percent in July. China is set to release it 2008 macroeconomic figures before the Chinese Lunar New Year.