China will raise its benchmark one-year lending and deposit rates by 25 basis points effective Wednesday, the People’s Bank of China has said. The move takes the one-year deposit rate to 2.5 per cent, and the one-year lending rate to 5.56 per cent.
Raising rates will dampen domestic demand for credit, which has remained high despite efforts to restrict bank lending. A different tightening measure was reported last week, when China’s central bank temporarily raised the reserve requirement by 50bp for six major banks. This also removes money from the system and restricts credit availability.
The recent weakening of the dollar will have added to existing inflationary pressures in China. The renminbi closely tracks the dollar; if it were free-floating, the Chinese currency would have strengthened as the dollar fell. Annual inflation was reported as 3.5 per cent in August. September’s data is due out on Thursday, and expectations are for a slight rise.
In a slight twist to a straightforward tale of monetary policy, one Reuters interviewee has suggested we are witnessing the result of a Sino-American agreement. Read more
Having strengthened yesterday, the renminbi has opened sharply down against the dollar – indeed by the largest weakening since December 2008.
China is carrying out stress tests on labor-intensive industries to gauge the effect a stronger yuan would have on earnings, reports Bloomberg (itself reporting local paper the 21st Century Business Herald). Consequent speculation on the yuan has pushed forward prices up.
Chris Giles
Michael Steen
Robin Harding
Ralph Atkins
Claire Jones
