Page last updated at 09:38 GMT, Wednesday, 26 November 2008

China's central bank cuts rates

China flag
The size of the rate cut has surprised many economists

China's central bank has cut the country's interest rates for the fourth time since mid-September in order to stimulate economic growth.

The rate cut, which will come into effect on Thursday, will see rates fall to 5.58% from 6.66%.

This is the biggest cut in the cost of borrowing in China since October 1997, during the Asian financial crisis.

China's central bank has also lowered the rate on one-year fixed deposits, to 2.52% - down from 3.6%.

The People's Bank of China said that its cut in its key interest rates was meant to ensure there was sufficient liquidity in the banking system to ensure growth.

At the same time the central bank said it was lowering banks' required reserves - the money they are required to keep on deposit with the central bank.

The requirement for big banks will decrease by 1 percentage point, while that for smaller banks will be cut by 2 percentage points.

China's rate of economic growth is expected to slow sharply as a result of the global downturn.

'Drastic move'

Commentators were surprised by the size of this latest cut in interest rates, and said it was an indication of how seriously the government viewed China's economic situation.

"It's certainly a lot more aggressive than anything they've done recently. I think it speaks volumes about just how much China has slowed down," said Anthony Muh, at AT Asset Management in Hong Kong.

Liu Dongliang, at China Merchants Bank in Shenzen, said: "All my colleagues were shocked by such a big easing."

"It signals the government may believe the economic situation is really serious for it to call for such a drastic move," he said.

Callum Henderson, of Standard Chartered Bank, Singapore said: "The Chinese authorities are doing their part to shore up economic expectations and put a floor under growth for next year."

"The fact that this was much larger than expected is obviously a surprise to markets, but should be well received," he added.

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