China has cut has cut one of its key interest rates in response to worries over its flagging economy which sent stock markets into a tailspin last week.

The People’s Bank of China (PBOC) lowered its one-year loan prime rate to 3.45% from 3.55% but disappointed markets by keeping the five-year rate unchanged amid broader concerns about a rapidly weakening currency.

It is the second cut in its one-year rate – on which most of China’s household and business loans are based – since June.

Markets in Europe were expected to open slightly higher despite expecting a bigger response from Beijing. In China itself, the Shanghai Composite was down 0.5%, while the Hang Seng index in Hong Kong was down 1.5%. The Nikkei 225 index in Tokyo was up 0.6%. 

The recovery in the world’s second-largest economy has lost steam due to a worsening property slump, weak consumer spending and tumbling credit growth, adding to the case for authorities to release more policy stimulus.

A slowing Chinese economy sent shivers through stock markets on Friday and raised concerns for companies exposed to the world’s second biggest economy.

British manufacturers trading products and components are on alert to the deteriorating outlook as downbeat figures over the past week have indicated that China’s economic slowdown is gathering pace.

Growing anxiety over China’s worsening property crisis also ended the seven-week bullish streak in the oil price as a weakening demand outlook led to its first weekly fall since mid-June.

China’s real estate giant Evergrande Group filed for US bankruptcy protection as part of one of the world’s biggest debt restructurings.

While UK producers are less exposed than some countries to a weak Chinese recovery, there is concern that falling consumer demand could impact on sectors such as insurance and food & drink.

Figures last week showed sales of Scotch whisky to China shot up by 40% in the first half against a fall in total exports, but the new data will raise concerns that demand may not be sustainable. China’s imports and exports fell sharply in July.

The slump saw the overseas-focused FTSE 100 fall 47.48 points on Friday to close at 7262.43, taking its weekly loss to 3.5%, its worst one-week point and percentage decline since the beginning of July.

The index is down 5.7% since the beginning of this month and is 2.5% lower since the start of the year.

A looming crisis in the Chinese property market and a noticeable increase in US bond yields drove apprehensions of prolonged high interest rates, while a substantial decrease in UK retail sales further exacerbated the pessimistic outlook.

“Markets are being hit by the perfect storm, amid surging rates, worsening economic data in China, poor summer liquidity and a buyers’ strike,” said one analyst.

Among the biggest fallers were Prudential, down 3.2%, while Burberry fell 1.7%. Mining stocks took a hit, with Anglo American and Glencore both 1.8% lower.