China Cuts Interest Rates; Oil Prices Surge

The People’s Bank of China, the country’s central bank, announced the largest interest rate cut in 11 years today in an effort to get the economy moving again. From the New York Times:

The central bank, the People’s Bank of China, announced late Wednesday afternoon that it was lowering by 1.08 percentage points the one-year lending and deposit rates that banks are allowed to charge, effective on Thursday. The new lending rate is 5.58 percent and the new deposit rate is 2.52 percent. The central bank had already cut the benchmark rate three times since Sept. 16 and the benchmark deposit rate twice, by 0.27 percentage points each time.

The one-year lending rate is important in China because banks use it to calculate other interest rates, based on the maturity of the loan and the creditworthiness of the borrower.

Immediately following this news, oil prices rose globally, Bloomberg reported:

Chinese fuel demand has fallen “sharply” since September because of credit-market turmoil, the country’s biggest oil producer, China National Petroleum Corp., said Nov. 17. Prices fell from the day’s highs after a government report showed that U.S. oil and gasoline supplies increased more than forecast.

“Thank you People’s Bank of China,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “The Chinese action is definitely giving us a boost today. I don’t know if this rally will last because we’ve had a number of stimulus packages announced followed by short-term rallies.”

Crude oil for January delivery climbed $2.67, or 5.3 percent, to $53.44 a barrel at 11:25 a.m. on the New York Mercantile Exchange. Prices rose as much as $2.23, or 4.4 percent, to $53 before the Energy Department released its weekly report today at 10:35 a.m. in Washington. Futures have dropped 64 percent since reaching a record $147.27 on July 11.


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