China cut interest rates for the first time since 2008, steppingup efforts to combat a deepening economic slowdown as Europe'sworsening debt crisis threatens global growth.

The benchmark one-year lending rate will drop to 6.31 percentfrom 6.56 percent effective tomorrow, the People's Bank of Chinasaid on its website today. The one-year deposit rate will fall to3.25 percent from 3.5 percent. Banks can also offer a 20 percentdiscount to the benchmark lending rate, the PBOC said, wideningfrom a previous 10 percent.

European stocks and U.S. index futures extended gains as China'smove fanned optimism that policy makers around the world will domore to bolster growth. The announcement, two days before China isdue to report inflation, investment and output figures, may signalthat the economy is weaker than the government expected.

“This will be the beginning of a rate cut cycle and there willbe at least one more reduction this year,” said Shen Jianguang, aHong Kong-based economist with Mizuho Securities Asia Ltd. “Thedata to be released over the weekend must be very weak andinflation must have eased sharply.”

The MSCI All-Country World Index added 0.8 percent at 7:30 a.m.in New York. The Stoxx Europe 600 Index jumped 1.2 percent,extending yesterday's biggest rally in six months, while theStandard & Poor's 500 Index futures advanced 0.7 percent.

The central bank last reduced benchmark interest rates in late2008, when the government unveiled a 4 trillion yuan ($586 billionat the time) stimulus package to counter the effects of the globalfinancial crisis. Interest rates have been unchanged since anincrease in July 2011.

Industrial output in China, the world's biggest producer ofsteel and cement, probably rose 9.8 percent last month from a yearearlier, close to the slowest pace in three years, according to themedian estimate in a Bloomberg News survey of 27 economists aheadof a National Bureau of Statistics report due June 9.

Inflation may have moderated to 3.2 percent in May from a yearearlier after a 3.4 percent rate in April, a separate surveyshowed, the fourth month consumer prices have risen by less thanthe government's 2012 target of 4 percent.

Today's move signals policy makers are concerned that the costof borrowing is crimping companies' spending and holding backexpansion in the world's second-biggest economy. Three bankofficials told Bloomberg News last month that the nation's biggestbanks may fall short of loan targets for the first time in at leastseven years as demand for credit wanes.

Slowdown Worsening

China's manufacturing expanded at the slowest pace in six monthsin May, a government report showed on June 1, adding to signs thenation's slowdown is worsening. A separate purchasing managers'index from HSBC Holdings Plc and Markit Economics pointed to aseventh straight contraction, the longest stretch since the globalfinancial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledgedlast month to place greater emphasis on stabilizing growth afterdata showed April industrial production, new loans and exports allincreased less than economists forecast. The data prompted banksincluding Goldman Sachs Group Inc., Morgan Stanley and Bank ofAmerica Corp. to cut their economic-growth estimates.

Expansion may drop to 7 percent or “slightly below” this quarterfrom a year earlier, Dong Tao, a Hong Kong-based economist withCredit Suisse Group AG said last month. Ding Shuang, a HongKong-based economist at Citigroup Inc., forecast 7.5 percent. Thatfollows an 8.1 percent expansion in the first three months of theyear, the fifth quarterly deceleration.

Tao said the government may respond with a stimulus of as muchas 2 trillion yuan, half the size of a package announced in late2008 to cushion the economy from the impact of the global financialcrisis.

Even so, the official Xinhua News Agency said in a May 29article that the government has no intention of rolling out another“massive” stimulus, damping speculation of more aggressive policiesto support growth.

China's inflation has slowed this year, giving the governmentmore room to ease policies. The consumer-price index rose 3.4percent in April from a year earlier, the third straight month it'sbeen below the official target of 4 percent. The rate was 6.5percent in July, the highest since 2008.

Bloomberg News

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