China Increases Interest Rates Third Time in 2011

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The People’s Bank of China said it would increase one-year lending rates by a quarter of a percentage point to 6.56%.

Benchmark one-year lending rates will be raised 25 basis points to 6.56 percent, and benchmark one-year deposit rates will be raised 25 basis points to 3.5 percent.

The bank had warned earlier this week that it faced “large” inflationary pressures, and the interest rate rise, which will take effect today, is the third this year. Inflation in China hit 5.5% in May, and is thought to have risen further last month, being driven by abundant liquidity and elevated commodity prices. This has caused an unsettling in Beijing, where there are fears rising prices may stir social unrest.

China’s move comes as the European Central Bank prepares to increase borrowing costs in the eurozone for a second time, despite?the mounting sovereign debt crisis?in the single currency zone.

China has also used a series of other tools, including raising bank reserve requirements, to bring growth under control and prevent prices from spiraling.

Taming the interest rate is a top priority even as the economy slows gently, as stubbornly high inflation threatens to unsettle global markets.

Excessive cash in the economy, partly stemming from China’s huge trade surplus, is a root cause of fast-rising prices, and Beijing hopes that higher rates will encourage savers to keep more of their money in banks and also weigh on demand for mortgage loans.

Rise in stocks

China?s stocks rose, driving the benchmark index to a seven-week high, on speculation the central bank is done raising interest rates this year after the third increase of 2011 took effect today.

?The market has already priced in the increase in?interest rates?and the rebound may continue,? said?Zhang Ling, general manager at Shanghai River Fund Management Co. ?Investors expect that it?s the end of the rate hike cycle and economic growth will pick up again.?

The interest-rate increase may be the last for 2011, according to JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Merrill Lynch. Nomura Holdings Inc. predicts one more move, this quarter.

China?s economy?grew 9.3 percent in the second quarter, slowing from a gain of 9.7 percent a quarter earlier, according to estimates in a survey by Bloomberg News. That figure and the June inflation number are due to be released July 15.


The euro extended losses and commodity currencies fell yesterday after China raised rates for the third time this year, driving investors to shed exposure in riskier assets in a market already shaken by Portugal?s rating being cut to junk.

??When the Chinese raise interest rates the initial reaction of the commodity currencies is normally negative in the short-term but the story is that China is serious about moderating the pace of its economy and the trend is still a positive one,? said Peter Kinsella, analyst at Commerzbank.

The Australian and New Zealand?dollars held up well as a stronger Wall Street supported risk sentiment, offsetting worries about the impact from another?China?rate hike and renewed strains in EU debt markets.

Aussie weighed because of the heavy exposure of the Australian economy to?China. Slower Chinese growth could crimp demand for coal and iron ore,Australia’s two top exports. For NZ,?China?is the second-biggest trade partner after Australia.

US stocks finished higher, rebounding from a weak open, while the CRB commodity index and?US?crude oil fell. But gold, a safe haven, rose 1 pct.


Gold prices slipped below $1,510 an ounce, surrendering some of the previous session?s 1.3 percent gains, after China?s decision to lift interest rates boosted the dollar and sparked selling of commodities.

Both factors weighed on gold, but the metal is expected to remain relatively well supported by concerns over euro zone debt, rising inflation in China, and an upcoming debate on raising the US debt ceiling.

Asian stocks were mixed in early trade today, with Shanghai and Hong Kong rising on hopes that China’s latest interest rate hike will be its last for some time.

However, while China sees the rate hikes as necessary, there are fears that they could put the brakes on growth and in turn stunt other economies that rely on it, such as Australia.


This hike in interest rates could have an unfavorable effect in the MENA region. China’s economy, being mainly export driven, could see a drop in its exports.

However, as the increase in rates is just a quarter of a percentage point, there are hopes that it will not affect exports in any major way, though there could be a substantial increase in export prices.

Sources: Guardian, Reuters, Bloomberg, tradingeconomics, khaleejtimes, thenews

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