Tuesday, February 8, 2011

China's central bank raises interest rates

China's central bank raises interest rates
Posted: 08 February 2011 1905 hrs

BEIJING - China's central bank on Tuesday raised interest rates for the third time in four months, as authorities ramp up efforts to tame inflation amid fears it could trigger social unrest.

The People's Bank of China said in a brief statement that it would raise the one-year deposit and lending rates by 25 basis points each, taking the rates to 3.0 percent and 6.06 percent respectively.

In October, policymakers raised rates for the first time in nearly three years as they try to restrain a flood of liquidity which has been fanning inflation and hiking property prices. They raised them again on Christmas Day.

China's consumer price index (CPI), a key measure of inflation, rose 4.6 percent year-on-year in December, down from 5.1 percent in November, which was the fastest rate in more than two years.

The full-year CPI was up 3.3 percent, exceeding Beijing's official target of three percent. The government has raised its CPI target to four percent for 2011, as it is forced to acknowledge its limits in constraining prices.

Brian Jackson, senior strategist at the Royal Bank of Canada, said the latest rate hike highlighted the fact that inflation had become the government's key policy focus.

"Price pressures are building, they're at uncomfortably high levels already and there's a good chance that they could go further in the next few months," he told AFP.

"There is a greater sense of policy urgency now in Beijing to deal with that."

Ever fearful of inflation's historical potential to spark social unrest, authorities have already pulled on a variety of levers to try and rein in consumer prices and tame the red-hot real estate sector.

These include the three interest rate hikes and a number of bank reserve requirement ratio increases.

But last month, Zhou Xiaochuan, the central bank's governor, warned that inflation was still higher than expected and said authorities had to remain vigilant, suggesting a rate hike could be on the horizon.

Also last month at the World Economic Forum in Davos, business leaders raised concerns over China's property prices, with some worrying that if the bubble burst it could hurt growth.

China's property prices last year defied cooling measures, climbing for four straight months to December and frustrating first-home buyers who feel apartment prices are out of their reach.

To try to remedy this, the government has launched a property tax trial on two of China's biggest cities and raised minimum downpayments. It has also ordered banks not to provide loans for third home purchases.

Jackson said he expected another two interest rate hikes in the second and third quarters of this year, as the government continues to try and battle inflation.

"Inflation has still got a little bit more to go in the first half of the year, but we would expect it to start to ease in the second half of the year," he said.

The latest interest rate rise was announced on the last day of a nationwide holiday marking the Lunar New Year, during which stock markets on the Chinese mainland were closed.

Source: Channelnewsasia

My Comments: China raised interest rates (AGAIN!). As expected, STI today tested the 100dma at around 3185 and remains supported at that level. STI would likely fall tomorrow (AGAIN!), although that is a chance that it may not due to recent selling (traders/investors might have already priced in the interest rate hike). So, till then, lets watch and see how the market performs tomorrow.


  1. China should allow the renminbi to appreciate. It would enrich their citizens, curb inflation, and do very little to hurt export competitiveness while improving domestic activity.

    If the currency were to appreciate 20%, raw materials would be 20% less expensive, energy costs would drop 20% and shipping would cost 20% less - thus, export goods would still be very competitive.

  2. Hi Frank Beck

    I totally agree with you! But the China governments seems to think otherwise...

    Till then, I think it would be prudent to just tailor one's investment strategy to suit China's expected policy decisions, by staying out of China's property market sector (which in my opinion, a bubble may be forming)

    Thanks for visiting and best regards!