China on Thursday cut interest rates for the first time in over three years and moved to allow rates to float more freely, in a bid to boost a slowing economy and advance financial reform.
The People's Bank of China, or central bank, said in a statement it would cut the benchmark one-year lending rate by 0.25 percentage points, while the one-year deposit rate would fall by the same amount from Friday.
It will also allow banks to offer deposit rates up to 10 percent higher than the benchmark rate and provide loans with rates of up to 20 percent lower.
Analysts said the twin moves send a strong message that China is ready to ease monetary policy to shore up growth in the world's second largest economy while pushing forward with key economic reforms.
The rate cut comes amid rising concern over a growth slowdown in China, which has played a key role in supporting the global economy in the current downturn. It marks China's first interest rate cut since December 2008.
"China's economy is in a hard landing. Loosening credit will address this situation," Hu Xingdou, an economist at the Beijing Institute of Technology, told AFP.
The move came shortly before Saturday's release of economic data for May, which investors fear could further confirm a slowdown.
Monetary easing had widely been expected following dismal economic figures in April and weaker manufacturing activity in May.
"The cut is a clear and strong signal to the market of the loosening policy stance. It reflects the concerns of the top leadership... on slowing economic growth," Goldman Sachs said in research note.
The rate cut comes hot on the heels of last month's cut in the amount of money banks are required to keep in reserves -- the third since December last year -- which was also aimed at pumping more funds into the slowing economy.
China's economy grew an annual 8.1 percent in the first quarter of 2012 -- its slowest pace in nearly three years.
The government has reduced its economic growth target for this year to just 7.5 percent, down from actual growth of 9.2 percent last year and 10.4 percent in 2010.
Mark Williams, chief Asia economist at Capital Economics, said the cut was a signal that policymakers were concerned about growth.
"Policymakers are going all out to shore up the economy," he said.
Ken Peng, a Beijing-based senior economist at BNP Paribas, said the move to allow banks more flexibility in setting their deposit and lending rates was equally significant.
"That's a massive change because this is the interest rate liberalisation that people have been calling for, for many years," he told AFP.
"It gives banks more freedom to compete for both deposits and loans," he said, adding the move came before a once-in-a-decade leadership change in the autumn -- when such reforms would normally be put on a back burner.
"The fact that it's happening now shows there is a fairly strong consensus for financial liberalisation, financial sector reform, and that's extremely positive," he said.
Previously, deposit rates were not allowed to float above the benchmark and lending rates could only be discounted by 10 percent, analysts said.
China sets interest rates by administrative fiat but officials have vowed for years to move towards liberalisation, which will allow more competition.
Following the interest rate cut, the one-year yuan lending rate will stand at 6.31 percent and the one-year yuan deposit rate will be 3.25 percent, the official Xinhua news agency said.
China had previously hiked interest rates five times since October 2010, in an effort to control surging inflation due to worries of social unrest.