The People’s Bank of China (PBOC) announced it would raise one-year deposit and lending rates by 25 basis points taking the deposit rate to 3.25 percent and the lending rate to 6.31 percent, on the last day (April 5) of the three-day Qingming Festival or Tomb Sweeping Festival. The new rates take effect from April 6.
The rates hike is the second time this year and the fourth time since last October. The hike was earlier than expected in the market. However, viewing the inflation situation in the country, the hike seems reasonable.
Analysts believe that the rates hike suggests that curbing inflation is currently the primary work in the policies and monetary tightening should continue. The reasons are as following:
Firstly, China’s manufacturing Purchasing Managers Index (PMI) in March climbed to 53.4%, suggesting that the economy growth in the future is to be slowed, but concerns over “economy downturn” is unlikely to happen.
China’s economy expanded 9.7 percent in the first quarter of 2011 year on year, according to the National Bureau of Statistics (NBS). The economy as a whole still maintains strong growth momentum.
Secondly, inflationary pressure is still heavy in China. In the world market, the price of crude oil stays above US$ 100. Moreover, the Food and Agriculture Organization of the United Nations (FAO) expects that food price in the future will remain high. At home, it is estimated that the CPI may continue to go upward and rise above expectations.
Prior to the rates hike, the central bank has raised the deposit reserve requirement ratio (RRR) for several times to a record high of 20%. This year, the monetary authorities have implemented tighter policies and the RRR has seen a three-time rise during the first three months. It is said that raising the RRR is helpful to control liquidity.
Analysts say though the monetary tightening is taking effect, the monetary policy will not weaken the priority of “fighting inflation”, and prudent monetary policy still needs to be kept.
What are the deep reasons for the interest rates hike? What kind of influence will the rates hike exert to the market? Where are the monetary policies going? Will there be another rates hike in the future? Special Report of China’s Foreign Trade this issue will share more with you.