The surprise cut sparked a rally in global stock markets, with investors hopeful that Beijing will ride to the rescue of a global economy that is once again teetering on the brink of recession. But after growth slowed to 8.1 per cent in the first quarter, recent data showed the economy was on track for a sharp deceleration. With the cut, China's benchmark one-year lending rate will now be 6.31 per cent, while the one-year deposit rate will be 3.25 per cent. "Cutting the interest rate definitely shows that they are concerned about downside risks to the economy," said Ken Peng, an economist with BNP Paribas in Beijing. Wen Jiabao, China's premier, has vowed that the government will kick-start more investment projects, though officials have also downplayed expectations for anything on the order of the mega-stimulus package launched in 2008. China will publish a raft of economic data, from industrial output to retail sales, this weekend. Some in the market had thought that the data would show a rebound was already under way, thanks to the government's more growth-friendly stance over the past month. However, the decision to cut interest rates suggests that the numbers may be much weaker than expected. The cabinet, which makes rate decisions, will have already seen the latest data. The People's Bank of China, which raised interest rates three times last year, had previously characterised its monetary stance this year as "fine tuning," arguing that nothing dramatic was needed to support the economy. The rate cut marks a definite change. It "indicates that the [central bank] has formally entered into a stage of policy easing from that of policy fine-tuning. Further rate cuts will depend on China's inflation outlook," said Liu Ligang, chief China economist with ANZ. Inflation was stubbornly high last year but has slipped back towards 3 per cent this year, giving the central bank more scope for easing policy. The question now is whether businesses and households will respond to the lower rates by borrowing more. Banks have reported weak loan demand over the past two months. If Beijing loosened the reins on local governments and let them borrow again from banks to fund infrastructure investments, loan growth could come roaring back. But the authorities are wary of loosening too quickly and unleashing a lending surge as was seen three years ago, saddling banks with bad debts. In an important move alongside the rate cut, the Chinese central bank said it would allow banks to set deposit rates 10 percent above the benchmark level and to set lending rates 20 per cent below the benchmark. This is a step towards interest rate liberalisation - that is, letting banks decide for themselves, based on market conditions, the level at which they set rates. Analysts believe this is crucial to putting the economy on a more stable footing by ensuring that households earn a fair return on their bank savings, thus encouraging more income to be used for consumption. This is not just about stimulating the economy. It's also about liberalising interest rates," Mr Peng said. It shows that the political will for financial reform is strong.