The Peoples Bank of China this evening announced that interest rates for both borrowers and savers would reduce by 25 basis points.

Loans will now incur a rate of 6.31%, while savings deposits will attract 3.25%. The change is effective Friday June 8.

The lower savings rate is a further burden on Chinese people, who must save to protect themselves in the absence of an adequate social security safety net. If it is meant to encourage savers to use their money for spending rather than saving, it’s not a big step. With inflation already travelling above the interest rate, savers were already being penalised. A 25 basis point pain is unlikely to boost domestic consumption much.

But the other side of the announcement is also likely to have limited success, if it is meant to encourage further investment. Banks are limited by the RRR ratio from loaning out too much money, regardless the interest rate. Those entrepreneurs who might be interested in taking loans are already looking for good reasons to do so - with exports in a slump, domestic consumption not at a significant pace and the housing market collapsing, the fact that a loan is a moot point. Why build new factories when the demand isn’t there?

More likely this announcement was driven by the fact that interest rates around the world are relatively low. If China were to leave its rate above the rate in Europe or the USA, it would only attract capital seeking better returns. China needed to keep its rate in some sort of alignment with the rest of the world.

One possible consequence of this announcement is that the RMB might not appreciate as fast as before. Not that it has been appreciating recently. As money has departed China in search of safer havens, and as exports slumped, the Yuan has turned down the past few weeks. This announcement will likely keep it that way a while longer.