So here it is — the fifth Chinese rate hike since October last year.
As Reuters reported on Wednesday:
BEIJING, July 6 (Reuters) – China’s central bank increased interest rates for the third time this year on Wednesday, making clear that taming inflation is a top priority even when as the economy slows gently. 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 central bank said in a short statement on its website. The increases will take effect from Thursday. Abundant liquidity and elevated commodity prices drove China’s inflation to a 34-month high of 5.5 percent in May, unsettling Beijing which worries rising prices may stir social unrest.
The immediate market reaction saw the dollar rise, the FTSE fall, both WTI and Brent crude decline , and copper hit a session low of $9,473 per tonne.
Some quick-thinking analyst thoughts on the move, meanwhile, came from Capital Economics’ senior China economist Mark Williams, who beileves this will be China’s last hike now for awhile:
The People’s Bank of China (PBC) has today raised benchmark interest rates for the fifth time since October. Benchmark 12m lending and deposit rates have been increased by 25bp, taking them to 6.56% and 3.50% respectively. Most analysts had been expecting at least one more rate move this year, although we had thought that the PBC was more likely to remain on hold.
The market has recently swung behind the view that economic growth is weakening in China, and in key trading partners too. As a result, there has been a growing feeling that the next rate move would be delayed or, perhaps, not come at all. For this reason, the announcement could add to growing concerns that policymakers are tightening too much and that efforts to control inflation will push China’s economy into a hard landing.
We disagree (and note in passing that the consensus view not too long ago was that the People’s Bank was “behind the curve”). Higher borrowing costs from banks will make little difference in practice. Benchmark lending rates are still low relative to the pace of economic growth. The constraint on credit growth is the amount that banks can lend rather than the rates they charge.
We suspect that appetite for further tightening will nonetheless wane in response to evidence that the economy is slowing. Inflation probably rose above 6% in June but is now widely expected to decline in the second half of the year. Interbank rates, which are a guide to how much room banks have to lend, are back to pre-crisis levels. We expect no more rate moves, but continue to expect two further 50bp increases in the required reserve ratio, reflecting the PBC’s continued efforts to mop up currency inflows and its reliance primarily on quantitative measures to control credit growth.
Though, SocGen’s Sebastien Galy is unconvinced the move will help the EURUSD crossrate:
Equity markets have now recovered but the Chinese hike of 25bp while somewhat expected won’t help things along as EURUSD trades above its credit spread signal. This suggests still some downside for the pair before it recovers.
More comment as we get it.
Related links:
Moody’s warns on China’s local debt – FT
Waiting for a Chinese local debt disaster – FT Alphaville
Introducing Alphachat, the FT Alphaville podcast – FT Alphaville