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China's central bank cuts reserve requirement ratio, interest rates

(Xinhua/Agencies)
Updated: 2008-10-08 19:19

BEIJING - China's central bank on Wednesday announced cuts in both the interest rate and reserve-requirement ratio in the latest effort to boost the domestic economy amid worries over the deepening global financial crisis.

A woman walks in front of the headquarters of China's central bank, the People's Bank of China, in Beijing October 8, 2008. The central bank on Wednesday announced cuts in both interest rate and reserve requirement ratio in an effort to boost domestic economy amid worries over global financial crisis.[Agencies]

The deposit and lending rates would be lowered by 0.27 percentage points from Thursday and the reserve-requirement ratio would be down by 0.5 percentage points from October 15, the People's Bank of China (PBOC) said.

The loosening in monetary policy, the second such move in less than a month, highlighted the government's rising concern over the slowing economy and slumping capital market.

The PBOC cut the benchmark one year lending rate by 0.27 percentage points on September 16, the first rate cut in six years. It also lowered the reserve requirement at medium- and small-sized lenders by 1 percentage point as of September 25.

Tang Min, China Development Research Foundation deputy secretary, said the government made the move mainly out of concerns over domestic problems.

"The deepening U.S.-originated credit crisis has impacted the psychology of Chinese and also the real economy," Tang said.

The move was also a timely response to the rate cuts by other central banks and part of a coordinated effort to stem the global crisis, he said.

The State Council, China's Cabinet, said it would scrap the 5 percent individual income tax on savings interest earnings starting on Thursday to boost domestic demand.

China began levying a 20 percent individual income tax on interest earnings in 1999 to narrow the income gap and encourage consumption and investment. The tax rate was slashed to 5 percent on August 15, 2007.

China's move is part of the concerted efforts by global central banking authorities to respond to the global crisis.

In a coordinated move, the Federal Reserve cut a key U.S. interest rate by half a percentage point Wednesday to steady an economy teetering on a collapse reminiscent of the 1929 stock market crash.

Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate by 0.5 percentage point to 1.5 percent. The action revives the central bank's rate-cutting campaign which had been halted in June out of concerns that those low rates would worsen inflation. Since then, however, economic and financial conditions have dangerously deteriorated, forcing the Fed to reverse course.

U.S. Federal Reserve Chairman Ben Bernanke speaks to the National Association for Business Economics (NABE) about the current state of the economy in Washington, October 7, 2008. Bernanke said recent economic data and financial developments showed that the outlook for growth had worsened while the outlook for inflation to ease had improved. [Agencies]

The fact that the Fed felt it couldn't wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.

Apart from the Fed and the PBOC, other central banks were also cutting their rates.

In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.

Other central banks also taking part include the banks of Canada, Sweden, and Switzerland.

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