News Analysis: Rate cut hints at monetary easing cycle

The Chinese central bank's latest interest rate cut of 25 basis points to both the benchmark lending and savings rates has stirred expectations of a monetary easing cycle.

In a little over three months, the People's Bank of China (PBOC), the central bank, has dropped the benchmark interest rates twice for banks in an effort to lower financing costs for borrowers amid an economic slowdown.

The PBOC also slashed the reserve requirement ratio (RRR) for banks in early February to stimulate economic growth.

"We don't exclude the likelihood that China is entering a cycle of monetary easing, as shown by the recent cuts to both interest rates and the RRR," said Jia Kang, a fiscal science researcher at the Ministry of Finance.

Given the mounting downward pressure on the economy, Jia said the loosening of liquidity control is necessary as it will keep economic growth within a proper range.

China's economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years, and a string of economic indicators for the new year, including manufacturing and trade data, all suggested continued weakness.

China's consumer inflation in January came in at the slowest pace since November 2009, and the producer price index (PPI), which measures wholesale inflation, plunged 4.3 percent, marking the 35th straight month of decline and pointing to continued weak market demand.

Kuang Xianming, director of the research center for economy under the China Institute for Reform and Development, said the central bank's latest rate cut was a choice that suited the needs of the real economy and is not out of the ordinary.

Since 2014, major economies including Japan and the European Union have stepped up monetary stimulus measures in efforts to counter deflation and boost sluggish economic growth. Since mid-December, at least eight nations including Switzerland, Canada and India have announced interest rate cuts.

"In order to boost the real economy, a single round of interest rate cuts may not result in the desired effects and I think there could be more rate cuts in the pipeline," Kuang predicted.

However, economists caution against comparing the central bank's rate cuts to a strong stimulus.

"The interest rate cut is a normal operation required by real needs. It is also a far cry from the four-trillion-yuan stimulus package rolled out by China since 2008 to counter the global financial crisis," Jia said.

"It's like when you are driving a car, you keep adjusting the steering wheel left or right in order to keep the car on the right track. And I think the central bank's move is just aiming to lessen the economy's fluctuations," said Long Guoqiang, vice director of the Development Research Center of the State Council.

Following the announcement of the rate cut on Saturday, the central bank said in a separate statement that the cut does not represent an adjustment from its prudent monetary policy.

However, it said it aims to create a "neutral and appropriate" monetary environment that supports the nation's economic restructuring and upgrading efforts by paying more attention to the balance between tightening and loosening of monetary policy. Endi