Chinese cut rates to nudge economy

Europe looking at stimulus boost

BEIJING — China’s central bank unexpectedly lowered interest rates Friday in an attempt to re-energize the world’s No. 2 economy, joining a growing list of major economies that are trying to encourage growth in the face of a global slowdown.

On top of the rate cut, Chinese authorities promised to inject credit into the financial system if needed. Meanwhile, the president of the European Central Bank said Friday he was ready to step up stimulus for the 18-country eurozone economy, whose performance continues to disappoint. And Japan’s government this week delayed a tax increase after the country slipped back into recession.

News of China’s actions and the European Central Bank’s promises triggered a surge in stock markets, particularly in Europe. Germany’s DAX rose 2.6 percent while the Dow gained 0.7 percent. Asian stocks had closed before the Chinese announcements.

The slowdown in global growth is becoming an increasing concern for policy-

makers. Japan confirmed this week that it has fallen back into recession and will delay a tax increase to help consumer spending.

In Europe, it is not only weak growth but also the low inflation rate that is worrying the central bank. Low inflation or an outright drop in prices can weaken an economy further by encouraging delays in spending and investment.

As indicators for the eurozone and global economy disappoint, European Central Bank President Mario Draghi was firm in his message: “We will do what we must to raise inflation and inflation expectations as fast as possible,” he said in a speech in Frankfurt.

Of major economies, only the U.S. is considering raising interest rates. The Federal Reserve only recently ended a bond-buying program that helped reduce market interest rates because the economy is strengthening.

But the prospect of higher rates in the U.S. is exposing the country to a potentially painful rise in the dollar — currencies tend to strengthen with higher rates.

The dollar hit a sevenyear high against the yen, and jumped almost 1 percent against the euro on Friday. A stronger dollar makes it tougher for U.S. exporters to sell their goods internationally.

The People’s Bank of China said it is trying to address “financing difficulties” caused by a shortage of credit. It also said the move was not a change in monetary policy and economic conditions are within an “appropriate range.”

China’s government claimed economic growth fell to a 5-year low of 7.3 percent in the latest quarter and manufacturing and other indicators are declining. That has prompted suggestions China might intervene to prop up growth.

The rate charged by banks for loans to each other rose this week to its highest level since early October, reflecting reduced availability of credit, a concern for Chinese economic planners.

“If necessary, the central bank will provide timely liquidity support,” or extra credit to markets, it said in a separate statement.

The bank cut the rate on a 1-year loan by commercial banks by 0.4 percentage points to 5.6 percent. The rate paid on a one-year savings was lowered by 0.25 point to 2.75 percent.

It was the first rate cut since July 2012, and comes after the Cabinet called this week for steps to reduce financing costs for industry to make the economy more efficient.

In China, changes in interest rates have a limited direct effect on the government dominated economy but are seen as a signal to banks to lend more and to state companies that they are allowed to step up borrowing.