FX.co ★ China lowers interest rate in an attempt to stimulate economic growth

Largest banks in China announced that they are lowering interest rates in an effort to stimulate economic growth. This can be seen as the region's response to US actions aimed at GDP recovery, which has not been as rapid as anticipated.

Six state-owned commercial banks in China declared in their websites that interest rates for yuan demand deposits are now down 0.2% as compared to 0.25% last year. The banks also lowered rates on other deposit products, including five-year time deposits, which now stand at 2.5% compared to 2.65%.

This reduction in deposit rates makes storing money in banks more expensive for individuals and theoretically provides them with more incentives for new spending, further stimulating the economy. A survey by the People's Bank of China stated that 58% of depositors expressed a preference for saving rather than spending or investing. However, it is not guaranteed that lower deposit rates will immediately lead to increased household spending.

A more pressing issue at the moment lies with the unemployment levels. Recent data shows that youth unemployment reached a record level in April, surpassing 20%. China will release data on retail sales and unemployment for May on June 15.

Nomura economists say the rate cuts will certainly help increase bank profitability and lay the groundwork for the People's Bank of China to lower key interest rates. Such an event will provide more incentives for businesses to borrow.

The People's Bank of China has not changed interest rates for nine months, making the annual MLF rate stand at 2.75%, while the annual LPR is at 3.65%. The five-year LPR is at 4.3%. As China does not have inflation problems like many other countries, it can afford to maintain interest rates at a relatively low level.

In terms of the forex market, EUR/USD could grow further if the buyers get ahold of 1.0705 and 1.0670. Then, rising beyond 1.0740 will push the quote to 1.0770 and 1.0800, but reaching the latter may be difficult without strong reasons such as good economic data from the eurozone. In the case of a decline around 1.0670, euro will fall to 1.0635 and 1.0595.

GBP/USD could rise if buyers gain control above 1.2460. Only a breakdown of this level will lead to growth towards 1.2498 and a sharper upward surge towards 1.2525. In the event of a decline in the pair, sellers will attempt to regain control around 1.2430, which could lead to a fall to 1.2400 and 1.2370.