Beijing: China cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside, falling back on its major levers to stem the biggest stock market rout since 1996 and a deepening economic slowdown.

The one-year lending rate will drop by 25 basis points to 4.6 per cent effective Wednesday, the Beijing-based People’s Bank of China said on its website Tuesday, while the one-year deposit rate will fall a quarter of a percentage point to 1.75 per cent. The required reserve ratio will be lowered by 50 basis points for all banks to cover liquidity gaps, it said.

The acceleration of monetary easing underscores policy makers’ determination to meet Premier Li Keqiang’s 2015 growth goal of about 7 per cent. The risk of capital outflows and tighter liquidity after China devalued its currency on Aug. 11, weaker-than-forecast economic readings, and a 22 per cent stock market plunge over four days added pressure for more stimulus.

“The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy,” said Lu Ting, chief economist at Huatai Securities Co. “Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.”

China’s stock index futures and European equities rose.

Downward pressure

The economy still faces downward pressure and the task of stabilising growth, adjusting its structure, pushing reforms and improving living standards is very challenging, the PBOC said in a Q&A-style statement released after the move. Given volatility in global financial markets, “we need to use monetary policy tools more flexibly,” it said.

The PBOC on August 11 said it will allow markets greater say in setting the currency’s level, which spurred the biggest devaluation in two decades and threatens to trigger an outflow of capital. The PBOC has since intervened to stem losses.

Global markets have plunged since the move, with emerging market currencies and commodities among the worst hit.

China has halted intervention in the stock market so far this week as policy makers debate the merits of an unprecedented government campaign to prop up share prices, according to people familiar with the situation. Some officials argue that falling stocks will have a limited impact on the world’s second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private.

‘Changed tack’

“With the government’s efforts to prop up equity prices through direct purchases in tatters, policymakers have changed tack,” said Mark Williams, chief Asia economist at Capital Economics Ltd. in London. “The move may halt the market slide but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”

Deflation risks, over-capacity and a debt overhang remain a cloud over an economy forecast for its slowest expansion since 1990. Industrial production, investment and retail data all trailed analysts’ estimates in July.

Before today’s move, central bank Governor Zhou Xiaochuan had already this year lowered the required reserve ratio twice, with an additional move targeted to certain banks. Officials are also acting to boost lending including at the country’s policy banks.

Bloomberg’s monthly gross domestic product tracker suggests the economy expanded at a 6.6 percent pace from a year earlier in July.

—Bloomberg