BEIJING, Nov 26: China’s central bank announced on Wednesday a steep cut in its interest rates -- by four times the usual margin -- in a signal that it would pull out all the stops to boost weakening economic growth.

The benchmark one-year lending and deposit rates will both be reduced on Thursday by 108 basis points, compared with the usual 27 basis points in Chinese rate cuts, the People’s Bank of China said.

After the rate cut, one-year lending rates in China will be 5.58 per cent, while one-year deposit rates will drop as low as 2.52 per cent.

“It means the government is moving on more fronts to stimulate growth,” said Stephen Green, a Shanghai-based economist with Standard Chartered.

It was China’s fourth interest rate cut since mid-September, and the deepest rate cut since October 1997.Earlier this month, China announced an unprecedented four-trillion-yuan ($590bn) spending package to lift the economy, which grew at its slowest pace in five years last quarter.

The central bank move came a day after the World Bank said it expected China’s economy to grow by 7.5 per cent in 2009, a 19-year low.

“The economic situation now is even worse than in 1998,” said Xing Zhiqiang, a Beijing-based analyst with China International Capital Corporation, referring to the year just after the outbreak of the Asian financial crisis.

He said China was likely to see deflation -- or falling prices -- from next year.

“The bubbles in international commodity prices have burst and the prices of many raw materials are falling,” he said.

“Moreover, the slowdown in China’s own economic growth has gotten worse, triggering overcapacity and unemployment, which are likely to cause deflation as well.”

With inflation at 4.0 per cent in October, the latest cut in interest rates means that borrowing money from the bank is very cheap.

At the same time, putting money in the bank will be a guaranteed way to lose cash, as the real interest rate is defined as the deposit rate minus inflation. This will provide the Chinese with a strong incentive to spend, boosting domestic consumption.—AFP