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Surprise China interest rate cut won’t yield immediate results

Different values of China's yuan banknotes are placed on a window sill as Shanghai's skyscrapers are seen in the background, in this April 15, 2012 file photo illustration taken in Shanghai. China's central bank cut benchmark interest rates by 25 basis points on June 7, 2012 in a surprise move to shore up slackening economic growth, its first rate cut since the depths of the 2008/09 financial crisis.


Global commodities are unlikely to be helped much in the short- or medium term by a surprise interest rate cut by China, viewed by economists as a sign that the growth slowdown by the world's largest consumer industrial materials from iron ore to copper is deeper than expected.

China's central bank cut benchmark interest rates by 25 basis points on Thursday in the first such cut since 2008, bringing the one-year borrowing rate to 6.31 per cent and giving global markets and key commodities an initial boost.

The prices for oil, copper and gold all rose on the news, buoyed by the signal that China was moving to stop a slowdown that has idled construction cranes in Beijing and sparked concerns around the world that the commodity price super-cycle, more than a decade old, is petering out.

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But economists expect the optimism will be short-lived, because the Chinese stimulus will take time to ripple through the Asian economy and then the rest of the world. It could also be a sign that China is more than just a little concerned about the state of its economy.

"What it tells me is that the Chinese officials are quite worried about where their economy is going," said Bart Melek, head of commodity strategy at TD Securities Inc. in Toronto. "I would say that this necessarily does not bode well for commodities over the next few months. Ultimately monetary policy takes a while to have an impact."

China has been the growth engine that powered commodity prices to record highs over recent years as it underwent massive urbanization in the years leading up to and following the 2008 Beijing Olympics. The main staging stadium for the event, the so-called Bird's Nest Stadium, took five years to build and used 42,000 tonnes of steel.

But growth has slowed in the giant Asian economy, especially in the past year as it matures and embarks on fewer giant infrastructure projects. Commodity prices, while still high, are down from record levels, hurt too as the economic crisis in Europe put China's biggest export destinations virtually out of commission.

Melek and other economists will be keeping a close eye on more data due out of China in coming days, on consumer prices and industrial production, which could be weaker than expected if Thursday's rate move signals a deeper slowdown.

"The May data, not out yet, are still looking pretty bad, so we'll still have some negative information coming in that regard," said George Vasic, chief economist and strategist at UBS Securities Canada Inc. "We see this (rate cut) as a factor that will temporarily boost sentiment and obviously take out some of the tail risk on the downside, but at the end of the day its incremental."

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