A bank employee prepares bank notes at an Industrial and Commercial Bank of China Ltd cash center in Wuxi, Jiangsu province. [Photo provided to China Daily]

China's central bank is to cut benchmark deposit and lending rates to further lower financing costs for Chinese companies.

Effective Sunday, the one-year lending rate will be reduced by 25 basis points to 5.35 percent and the one-year deposit rate by 25 basis points to 2.5 percent. Benchmark deposit and lending rates for other maturities will be adjusted accordingly, the People's Bank of China (PBOC) said on Saturday.

"The focus of the rate cut this time is to let benchmark rates continue to guide market rates, further lower financing costs and provide a neutral and moderate monetary environment for economic restructuring, transformation and upgrading," said the PBOC in a statement on its website.

The central bank said it will emphasize keeping interest rates in line with trends in economic growth, commodity prices and employment while China will continue to implement a prudent monetary policy and use various tools to make micro adjustments.

The interest rate cut came after an across-the-board reserve requirement ratio cut for lenders by 50 basis points announced on Feb 4.

It is the second rate cut by the central bank within three months. On Nov 22, the PBOC cut the benchmark rate for one-year deposits by 25 basis points to 2.75 percent and the one-year lending rate by 40 basis points to 5.6 percent.

Lu Zhengwei, chief economist with the Industrial Bank Co Ltd, said the interest rate cut is a response to downward economic pressure and deflationary pressure. But he noted that the effect of the rate cut will be weakened unless banks stop paying for financial losses related to investment products including wealth management products.

Apart from the interest rate cut, the central bank will also increase the deposit ceiling to 1.3 times the benchmark rate from 1.2 to further promote interest rate liberalization.

Such an effort will help financial institutions strengthen their pricing power and improve construction of the pricing mechanism, the PBOC said.