Zhou Stokes Speculation China Is Poised to Cut Rates

By Dune Lawrence and Li Yanping

Dec. 18 (Bloomberg) -- Chinese central bank Governor Zhou Xiaochuan stoked speculation that an interest-rate cut is imminent, reiterating that falling inflation has added pressure for a reduction.

The pressure “is based on the outlook for inflation,” Zhou said in Beijing today. “Inflation may slow further in the future.”

China reduced borrowing costs by the most in 11 years last month to counter a deepening slump in the world’s fastest- growing major economy. Zhou said on Dec. 16 that rates may fall further, after inflation cooled in November to 2.4 percent, the weakest pace in 22 months.

“The prospect of a significant rate cut is high at the moment and they could move at any time,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. He expects the benchmark one-year lending rate to fall to 4.50 percent from 5.58 percent within three weeks.

A cut of that size would match last month’s -- the biggest since 1997.

President Hu Jintao pledged today that the government would apply “full force” to ensure steady and relatively fast economic growth. He was speaking at an event in Beijing to mark 30 years of free-market policies in China.

Fed’s Move

Asked if a reduction by the U.S. Federal Reserve also made a cut more likely, Zhou said: “Our decision is not necessarily linked with theirs; we will adjust our policies according to our own needs and data.”

The Fed cut the main U.S. interest rate to as low as zero on Dec. 16 and said it will do whatever is necessary to ease the longest recession in a quarter century.

China’s slowdown is deepening before a 4 trillion yuan ($584 billion) stimulus package announced last month kicks in. The central bank has reduced the one-year lending rate from 7.47 percent in September and dropped quotas limiting lending by banks.

People expect inflation to keep slowing, after a sharper- than-expected decline, Zhou said today.

To contact the reporters on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net