China Raises Interest Rates To Cool Inflation -- Again

China raised interest rates on Tuesday, its second increase in just over six weeks, intensifying a battle against stubbornly high inflation that threatens to unsettle global markets.

The timing was a surprise, coming on the final day of China's Lunar New Year holiday, but investors have long expected more monetary tightening as Beijing struggles to rein in price pressures and ward off a property bubble.

Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The rises take effect from February 9.

Although annual inflation slowed to 4.6 percent in December, it is expected to have picked up again in January with food prices soaring.

"It is the first interest rate rise in the Year of the Rabbit, but it will not be the last," said Xu Biao, an economist with China Merchants Bank in Shenzhen, referring to the Chinese New Year, which began last week.

Fearing tighter monetary policy will dampen China's demand, commodity markets fell after the central bank announcement. Three-month copper fell below $10,000 a metric ton and U.S. crude futures prices dropped.

The MSCI world equity index held on to gains, trading up 0.15 percent, but the FTSEurofirst 300 index was down 0.3 percent, turning negative after China's move.

TIGHTENING CYCLE

This is the third rate increase since China began a monetary tightening cycle in earnest in October.

"I didn't think it (China's rate hike) would happen today, but it doesn't matter whether you think it will happen today or tomorrow. You know that interest rates are going up," said Mike Lenhoff, chief strategist at Brewer Dolphin in London.

With inflation running near its fastest in over two years, Beijing hopes higher rates will encourage savers to keep more of their money in banks and also weigh on the demand for mortgage loans.

Anti-inflation talk from the central bank in recent months has primed investors for more policy tightening and, even with the latest move, many believe further tightening is on the cards.

A Reuters poll in December showed economists expect the one-year deposit rate to climb to 3.25 percent by June.

While tighter policy may put a lid on China's growth and has taken a toll on the country's share market, many analysts believe any economic slowdown will be moderate.

If anything, that China is tightening policy at a time when U.S. and euro zone interest rates are at record lows is a mark of confidence within the country that its economy, the world's second-largest, is on solid ground.

(Writing by Simon Rabinovitch; Editing by Neil Fullick)

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[loki]

06:30 AM on 02/10/2011

http://www.weirdasianews.com/2007/04/02/cannibalism-in-china-acceptable-if-for-health/

[Steve Rockett]

01:21 AM on 02/10/2011

Bernanke backdoored China with QEII. This is causing China to devalue its currency and will eventually put China on an even footing with the US. Cheap labor will disappear, because with inflation, businesses will have to pay more for employees. Well done Mr. Chairman.

[ArabianMoney]

05:34 AM on 02/09/2011

China is also going to be a big buyer of gold, some 5,000 tons if this forecast is right, see: http://www.arabianmoney.net/gold-silver/2011/02/09/cazenove-star-analyst-says-china-to-raise-gold-reserves-five-fold-and-boost-gold-price/

[AG creative]

08:16 PM on 02/09/2011

Can't eat gold. It's an old world currency.

[nopilikia]

03:16 AM on 02/09/2011

No worries for now.....rate increase only 25 basis points. China's middle class workers scored big raises last year after the fallout over working conditions and suicides at some of it's largest corps. They still have money to spend and are spending it to get ahead of inflation. China, like America used magic math to caculate inflation, unemployment, and the like. China's real rate of inflation is about 12% to 13%.

[guveqzero]

11:39 PM on 02/08/2011

How far the US has fallen. China controls the fate of our economy.

[nopilikia]

03:02 AM on 02/09/2011

Can you say......"thank you Congress, thank you Wall Street banksters"?

[billy the kid]

12:07 PM on 02/08/2011

anyone betting on china to continue its ~10% growth rate over the next few years be warned. commodity prices and other inputs rising in cost, in conjunction with the loosening of the renminbi as absolutely pegged, will definitely slow down this beast. in some ways i wouldn't be shocked to see inflation as the first step towards a more modest long term growth rate.

[oilfield]

12:13 AM on 02/09/2011

i think they see the writing on the wall....that is why they are doing the high speed rail really quickly....they know they wont be able to afford it in the future.....just like us.

[LunaPark]

12:43 AM on 02/09/2011

I'm betting on the continued growth. I'm not so worried about the property bubble. It's not the same as the bubble here in the US. For one thing, the rank and file Chinese are savers not borrowers and real growth comes from savings. Aother issue is Chinese domenstic retail sales keep climbing despite the increase in interest rates, a sign the Chinese are consuming their own production. The commodity increases are combination of demand in Asian emerging economies, and the falling value of the dollar.

[fortressfountain]

11:08 AM on 02/08/2011

I think they should raise the interest rate for savers. This is the only way to get the economy on track.
The stock market is a shell. It cannot keep going forever.

[Marcusarilius]

08:54 PM on 02/08/2011

Thats why we the people generously donate Hundreds of Billions of Dollars to the richest and wealthiest Americans. You know.. to support the stock market while we are trying to figure out how to feed our families.

[OpposingViewpoint]

10:06 PM on 02/08/2011

Can't do that. The TBTF's are literally insolvent, they need all the capital they can beg, borrow, and steal in an effort to continue the sham that is their reported profitability. Largely, the banks never really "unfailed". Our Congress is aware of that, so is the FED, AND our Treasury Department­­­­. U.S. banks have been merging with each other to hide their derivative losses with "paper asset" bookkeepin­­­­g that incorrectl­­­­y shows they are solvent with enough "assets" to overcome their losses. In reality, this is smoke and mirror accounting­­­­, “cooking the books”, a swindle worth $Trillions­­­­. The banks, with the privately owned Federal Reserve System at the helm, have turned into giant casinos by running a Casino Economy, rolling the dice that turned up nothing but s-n-a-k-e- eyes for Main Street. U.S. interest rates being kept low by the Federal Reserve System in an effort to hide the $100’s of Billions in derivative losses and the true insolvency of the banks. The moment interest rates start to run up, the banks will be left holding little more than paper value assets to offset their vast derivative gambling losses.

[guveqzero]

10:25 AM on 02/08/2011

Yep, the US no longer leads the world. And, we have no chance to recovery by doing the same old things. Germany learned long ago that managing companies while paying employees a good wage is the only way to survive in a global economy bent on transfering wealth accross borders.

[sonoffestus]

02:57 PM on 02/08/2011

Germany thinking people...............America, not so much.

[ainfl]

09:30 AM on 02/08/2011

We need to raise interest rates. My returns are laughable.

[cassie reinara]

10:33 AM on 02/08/2011

Not going to happen while Bernanke and the FED are around. They represent the Wall Street interests and how could banks make money if they need to pay reasonable interest rates to their depositors and than turn around and gouge their borrowers with high rates? Also, how would they cajole you into investing in stocks if you could get a safe and reliable return in CDs vs. putting your hard money in their worthless securities? Lastly, how could they penalize people for saving and force them spend their money on worthless junk from China?

[Hank007]

11:00 AM on 02/08/2011

I'm with the both of you. Stop giving banks free money, make them pay us to use ours, like the good ol' days.

[ArabianMoney]

05:37 AM on 02/09/2011

Bond markets set interest rates. The rate on the 10 year treasury is up from 2.4% to 3.6% since last October - that's a 50% increase since the Fed's QE2 program. So don't worry you will be getting higher and higher rates...

[MG Metiva]

08:37 AM on 02/08/2011

Me see that this not enough to stop inflation anymore. Not at all.

[cassie reinara]

10:36 AM on 02/08/2011

Not while the US FED continues to print money like there's no tomorrow. Maybe they know something. Maybe the FED has an Aztec or Mayan consultant? Bernanke is madman by any reasonable measure of his actions.

[AmosKnows]

08:51 PM on 02/08/2011

Of the explanations for the monetary policies which reign today the end of the world in 2012 or the need to float the eventual collapse of the ponzi scheme are the most logical.