Breaking News: People’s Bank of China raises interest rates25 December, 2010, 19:32. Posted by Zarathustra
People’s Bank of China dropped a bomb on Christmas day. It announced interest rates hikes on both lending and deposit by 25 basis points for one-year loans and deposits, effective from tomorrow, despite recent strain in the interbank markets.
I am surprised by the announcement not only because it was made on the Christmas Day, but also the fact the interbank liquidity is under strain of late, making a surprise interest rate hike looked unlikely. Despite the surprise element of the announcement, I believe this is the right move for China if they are serious about inflation. They need to raise interest rate, and allow the Chinese Yuan to appreciate in order to control the growth of money supply, which has been going too fast.
Of course, if they also aim to keep growing their economy fast, it will hard to keep that balance. I do expect more interest rates hikes down the road, but to balance growth and control inflation, I think the Chinese government will be very careful in not over-doing the monetary tightening, which may be a good thing or bad thing, depends on which side you are on.