China cuts interest rates

The People's Bank of China (PBOC) announced Friday that it would reduce its benchmark one-year lending rate by 40 basis points, from 6 percent to 5.6 percent. In addition, the rate for deposits with China's central bank would be cut by 25 basis points. Both measures would be effective on Nov. 22, the bank added.

The rate cut is the first engineered by PBOC in more than two years. The policy announcement also would give more freedom to commercial banks in setting lending rates for borrowers.

The PBOC's moves come amid weakening growth in the world's second largest economy, which saw the expansion rate of economic output (GDP) fall to 7.3 percent in the third quarter this year. The decline raised fears in the Beijing government that it might not reach its 2014 growth target of 7.5 percent, which it has said is needed to keep China's jobs market stable.

Markets surprised

Moreover, the slow pace of expansion in China's economy was manifested by a key economic indicator on Thursday. China's purchasing managers index (PMI) for the country's pivotal manufacturing industry dropped to 50 points - the dividing line between economic expansion and contraction.

Nevertheless, the PBOC's move was "a surprise" to analysts, said Andrea Tueni, a trader with Saxo Bank in Paris. "They've been reluctant to use rates to boost the economy because of fears of fuelling a credit bubble, so this shows that they are increasingly concerned about the economic outlook," he told the news agency Reuters.

And Alexandre Baradez, chief market analyst for IG, told the same news agency that China was now following the examples of the European Central Bank (ECB) and the US Fed, which were "driving markets."

European stocks extended an early rally on Friday, led by mining shares, which were boosted by the promise of higher commodity prices following China's move.

uhe/nz (Reuters, dpa, AFP)