China said Thursday it will cut interest rates for the first time in over three years and allow banks more flexibility to set their rates, in what analysts said was a key step towards financial reform.

The nation's 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 will 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 a 20 percent discount.

The move comes amid rising concern over a growth slowdown in the world's second largest economy. It marks the 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.

Monetary easing had widely been expected following dismal economic data in April and weaker manufacturing activity in May.

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.

Mark Williams, chief Asia economist at Capital Economics, said the cut was a strong signal that policymakers were focused on growth.

"The move underlines two points. First, that policymakers are going all out to shore up the economy. Second, that China increasingly resembles a normal economy," he said.

Ken Peng, a Beijing-based senior economist at BNP Paribas, added 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.

China's economy grew an annual 8.1 per cent 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 per cent, down from actual growth of 9.2 per cent last year and 10.4 per cent in 2010.

Following the interest rate cut, the one-year yuan lending rate will stand at 6.31 per cent and the one-year yuan deposit rate will be 3.25 per cent, 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.

channelnewsasia.com