OREANDA-NEWS. June 14, 2012. Chinese central bank's latest interest rates cut released a signal that the government has attached greater importance to stabilizing economy, analysts said.

The People's Bank of China announced the lowering of interest rates by 25 basis points, effective.

After the cut, the one-year deposit interest rate will fall to 3.25 percent while the loan interest rate 6.31 percent.

It marks the first time for China to cut the benchmark rates since December 2008, after which it has raised the rates five times to drain liquidity.

"Given China's current economic situation and its policy shift towards maintaining growth, the cut is well within expectations," said Zhang Liqun, researcher from the Development Research Center of the State Council, or China's cabinet.

In a State Council meeting last month, Premier Wen Jiabao said the government should "place maintaining growth in a more important position and carry out preemptive policy adjustments and fine-tuning more forcefully according to the changing situation."

The announcement came two days ahead of the release of the economic data, which indicated that inflation, the economy's major focus in the past few years, would not remain the government's top agenda.

According to the economic data published on Saturday, China's inflation unexpectedly eased to a 23-month low due to falling food prices and base effect.

The consumer price index (CPI), a main gauge of inflation, slowed to 3.0 percent in May, the National Bureau of Statistics (NBS) said, from 3.4 percent in April and 3.6 percent in March.

"The stabilization of price situation lifted worries for interest rates cut," noted Lian Ping, chief economist at the Bank of Communications, "The move is also an indispensable part of latest policies to increase the preset fine-tuning strength and to expand demands."

MORE MONETARY EASING AND FURTHER STIMULUS EXPECTED
In view of the recent economic growing trend, analysts believed that the government would do more to spur slower-than-expected growth in the world's second-largest economy.

"The May economic data confirmed that China's growth has not bottomed out, as was evidenced by the sooner-than-expected interest cut," said Wang Jun, a researcher at the China Center for International Economic Exchanges.

"The inflation pull-back has created more room for the government to pull policy levers to secure growth," Zhang Liqun stressed.

Tang Yunfei, chief macroeconomic analyst at Founder Securities, saw the cut is a signal of a new round of monetary loosening and he expected an acceleration in credit supply for the latter half of the year. "Credit supply for the whole year will exceed 8.5 trillion yuan," he predicted.

China's gross domestic product (GDP) grew 8. 1 percent in the first quarter, the weakest pace in nearly three years, owing to weary exports, domestic property market and its self-geared slowdown of fixed-asset investment.

Since the government's policy shift to shore up growth has become all the more necessary and the NDRC has ruled out the possibility of launching a massive stimulus package featuring large-scale investment projects, analysts expected that more monetary easing will be implemented to put growth on track.

Wang Yuwen, a researcher with Bank of Communications, expected no hefty interest rate cuts in the short-term, but did not rule out the possibility of a mild reduction in interest rates in the third quarter if the global economic outlook worsens.

Wang predicted that the central bank will cut the reserve requirement ratio by 50 points one to three times this year, a move to spur lending and consumption.

Meanwhile, besides more cuts to the bank reserve requirement ratio to boost credit supply, the government will also push forward reforms in income distribution and structural tax reduction to boost spending, analysts said.

"Our growth-stimulating policies should be forward-looking," Zhang said.