China Central Bank Cuts Interest Rate to Calm Stock Markets

In an effort to calm stock markets after two days of turmoil, China’s central bank has cut its main interest rate by 0.25 percentage points to 4.6% to boost growth in the country’s economy.

It is the fifth interest rate cut since November and will take effect on August 26.

The People’s Bank of China’s move has boosted global share prices further, with Wall Street’s Dow Jones index opening more than 1.7% higher after the move.

In mid-afternoon European trading, London’s FTSE 100 was up almost 3%, while Germany’s Dax and the Paris Cac were ahead nearly 5%.

Other European markets, including Lisbon, Madrid, Moscow and Milan, were all sharply higher.

The People’s Bank said that the interest rate cut was to reduce “the social cost of financing to promote and support the sustainable and healthy developments of the real economy”.

The Chinese central bank also acted to increase the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.

Its move was broadly welcomed by economists.

A research note from JP Morgan stated: “China’s decision to cut… will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the… cut in boosting the domestic stock market.”

The Chinese authorities have taken a number of steps to help stem stock market losses since the market began a series of heavy falls in June.

Earlier, China’s falling stock market had hit markets around the globe on August 24, and – although Asian markets were again hit overnight – European stocks had already opened in a more optimistic mood on August 25.

The main Shanghai Composite index closed Tuesday’s session down 7.6% at 2,964.97 points. Japan also saw more sharp falls, sending Tokyo’s Nikkei index down 4%.

The global sell-off has been driven by fears that China’s slowing growth means less business for everyone else.

China’s booming economy of the last 30 years has seen the country suck in supplies of raw materials for manufacturing and, increasingly, manufactured and luxury goods from other countries.