China cuts interest rates for the first time in 42 months.

But what surprised analysts more was the government’s move to give banks the flexibility to offer higher loan rates and lower borrower’s costs.

The central bank announced that effective 8 Jun, benchmark interest ratesfor deposits and loans would be lowered by 25bp. The new 1-year deposit interest rate is 3.25% while the benchmark 1-year loan interest rate is 6.31%. This marks the first interest-rate cuts since Dec 08, and likely precedes weak May data.

Financial analyst Song Seng Wun said he expected more RRR cuts before any interest-rate intervention, but the PBoC's decision was really surprising.

“The PBoC said the upper limit of the floating band of deposit rates will be adjusted to 1.1x the benchmark rate while banks will be allowed to offer 20% discounts to borrowers. Banks until now were generally not allowed to
dangle deposit rates higher than the benchmark rate with the downward float for loan profits controlled within 90% of the benchmark,” said Song.

The PBoC said the upper limit of the floating band of deposit rates will be adjusted to 1.1x the benchmark rate while banks will be allowed to offer 20% discounts to borrowers.

Banks until now were generally not allowed to dangle deposit rates higher than the benchmark rate with the downward float for loan profits controlled within 90% of the benchmark.

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