Together with the rate cut, the State Council also scrapped the 5 percent interest gains tax "temporarily."
Analysts said the package is meant to trim borrowing costs for companies against the threat of slowdown. This would also stabilize banks' profits by increasing their liquidity, while not diminishing their interest rate spread. It would also placate millions of savings account holders affected by the reduction in savings interest rate.
"The timing of the policy package is somewhat surprising as the market had expected the central bank to announce some major trading policies after the third plenary session of the Central Committee of the Communist Party of China," said Feng Wei, a Sealand Securities Co analyst. But Feng says, policy makers were driven by the global financial turmoil.
China's rate cut is in sync with moves by other major economies like the United States, United Kingdom and European Union nations.
"We think there is a potential for more economic slowdown and more rate cuts," Feng said. He felt there could be four to five more rate cuts through 2009.
The market too shares this view. Wang Qi, a Morgan Stanley economist, has called for four to five rate cuts through 2009 in China's base interest rates, equal to a cumulative reduction of 1.08-to-1.35 percentage points.
To bankers' relief, the central bank cut both lending and deposit rates this time, leaving them a cushion against the shrinking of interest spread.
However, analysts said, in future, lending rates are more likely to be cut, than savings.
"The tax incentive can't be given yet again and it is unlikely for the central bank to choke the savings rate if inflation continues above 3.8 percent," said Haitong's Qiu.
Banks are also facing greater lending costs.
"The best time to invest in listed banks hasn't come yet," said Feng. He rated the banking industry neutral.
(Shanghai Daily October 13, 2008)