Year of the Rabbit Ushers in China’s Second Rate Rise in Six Weeks

With prices rising along with , the Chinese government took action by raising the interest rate for the second time in six weeks, and promised more increases would be coming. From the Guardian:

Financial markets are braced for fresh action from China to curb inflationary pressure after Beijing announced the second increase in the cost of borrowing in six weeks. Analysts predicted that the tightening of policy from the People’s Bank of China, which will come into force on Wednesday, will be followed by further steps to deal with the price increases brought about by the country’s double-digit growth rate.

With dealers caught unawares by the timing of the move, the cost of oil and industrial metals initially fell on commodity markets, but later bounced back on speculation that the 0.25% jump in would do little to reduce China’s rapid expansion or global demand for fuel, food and raw materials.

“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, after the PBC said that from Wednesday benchmark one-year deposit rates would rise by 0.25 percentage points to 3% and one-year lending rates would go up by a similar 0.25 points to 6.06%. “If inflation stays high in February, the central bank will be forced to increase interest rates on a continuous basis,” he added. “Investor confidence will be seriously hurt by expectations of aggressive policy tightening.”

Bloomberg reports on the response to this news in the U.S. stock markets:

US stocks have opened flat as Wall Street weighed China’s latest interest rate hike that stoked concerns growth will slow in the world’s second-largest economy.

Dow Jones Industrial Average rose 1.97 points (0.02 per cent) to 12,163.60 in early trades.

The tech-rich Nasdaq Composite fell 2.63 points (0.09 per cent) to 2,781.36 and the broad-market S&P 500 index pulled back 1.22 points (0.09 per cent) to 1317.83.

With no economic news or earnings releases of note on the US calendar, investors digested the Chinese central bank’s announcement overnight that it would raise interest rates for the third time since October in a bid to tame rising inflation.

February 8, 2011, 1:57 PM
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