China Central Bank's Rate Cut Not to Significantly Impact Economy: Analysts

China's central bank has unexpectedly cut policy rates in order to support the country's measures to arrest the slowdown in growth and boost investment, but analysts say that the move will have only limited impact on the economy.

The People's Bank of China (PBoC) cut one-year lending rates by 40 basis points to 5.6%, while it reduced one-year deposit rates by 25 basis points to 2.75%. The rate cuts are effective from 22 November.

In addition, the central bank allowed commercial banks to increase the ceiling of deposit rates 1.2 times of the benchmark interest rates from 1.1 times previously. The move was intended to accelerate the interest rate liberalisation reform, according to the PBoC.

It is for the first time in more than two years Beijing is cutting benchmark interest rates.

"The reduction in the lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks. The financing costs of smaller firms, which borrow from the shadow banking sector, will not be affected," said Mark Williams, economist at Capital Economics.

"And without any relaxation in the quantitative limits on bank lending, a rate cut simply lowers the cost of credit, but doesn't increase the amount supplied. Accordingly, the impact on GDP growth will be small," he noted.

In the third quarter of the year, China's economy expanded by 7.3%. While this beat analysts' forecasts of 7.2%, it represents the slowest expansion for more than five years after China reported a 6.9% growth in the first quarter of 2009.

The growth rate is expected to decline further in the fourth quarter, despite a number of stimulus measures by the government, and the central bank was widely expected to go for further policy easing.

"We believe today's rate cut clearly signals that China's central bank has changed its monetary policy stance to a more 'accommodative' one," said economists at ANZ Bank.

They noted that China's State Council also released 10 measures this week to lower firms' funding costs, and asked the banking regulator to relax the requirement of loan-to-deposit ratio for the commercial banks.

However, they said the rate cut will not have much impact on the real economy.

"As deposit rate could even increase after banks are allowed to raise their deposit rates by 1.2 times of the new 2.75% deposit rate, this means banks' cost curve will continue to rise. Therefore, it is difficult for banks to lower their lending rates."

"Given the current monetary policy transmission mechanism is not working, we believe the PBoC will eventually cut reserve requirement ratio to fight the risk of deflation."