China will raise interest rates on Wednesday for the first time in nearly three years, lifting the benchmark deposit and lending rates by 0.25 per cent, the People’s Bank of China said.
The surprise move is the most decisive step yet to scale back the massive monetary stimulus China injected into its economy during the financial crisis and follows a strong rebound in growth and rising inflation.
The central bank said in a statement that the one-year lending rate in renminbi would rise from 5.31 percent to 5.56 percent, while the one-year deposit rate would increase to 2.5 percent from 2.25 percent.
China cut interest rates several times in between September and December of 2008 as the financial crisis began to take hold. This is the first increase since December 2007.
The decision comes ahead of the publication later this week of third-quarter growth and inflation numbers for September, and will prompt speculation that the figures will be stronger than expected. Inflation reached 3.5 percent in August, ahead of the government’s target for the year of 3 percent.
As its economy has rebounded sharply over the last eighteen months from the crisis, China has focused mostly on targeted policies to prevent the economy from overheating. For instance, the government has launched a series of measures to reduce speculation in the property market, amid sharply rising prices, and it is pushing through tough energy efficiency requirements.
One of the risks of raising rates is that the move may encourage a sharp inflow of capital into the country, especially given the continued low rates in the US and the expectation that the Chinese currency will appreciate in the coming years.
Another risk is that higher interest costs will put pressure on some of the local government-owned companies that borrowed heavily from Chinese banks during the crisis in order to fund ambitious infrastructure projects.
However, some officials have argued that as real interest rates on bank deposits are currency negative, the authorities need to begin lifting rates in order to try and prevent inflationary expectations from soaring.
Nick Chamie, head of emerging markets research at RBC Capital Markets, said that the decision was "part of the government’s efforts to unwind some of the extraordinary measures put in place during the financial crisis".
He said this was the start of a cycle of rate rises in China to be accompanied by further appreciation in the Chinese currency against the U.S. dollar.
CNN
