Tuesday 30 May 2017

Markets surprised by China's interest rise

The People's Bank of China stands in Beijing. Photo: Bloomberg News
The People's Bank of China stands in Beijing. Photo: Bloomberg News

Aileen Wang and Tom Miles

CHINA'S central bank surprised the markets yesterday by hiking interest rates for the first time in nearly three years, a move that reflects concern about resurgent property and commodity prices.

The rise may also mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

The People's Bank of China said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5pc and one-year lending rates to 5.56pc.

The impact was felt by markets across the board. Oil and gold prices tumbled, stocks turned negative in Europe and the dollar jumped.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, an economist based in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way."

Some analysts said the rate increase also suggested a deal was in place between China and the US to strengthen the yuan and erase worries about a currency war ahead of upcoming Group of 20 meetings.

But others said just the opposite was the case: with higher rates, Beijing can afford to rely less on currency appreciation to keep the economy on an even keel.

G20 finance ministers will aim to tackle the currency strains in a meeting in South Korea starting on Friday.

Once a consensus has been forged in Beijing to raise or cut rates, past experience shows that moves often come in bunches.

Irish Independent

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