September 25, 2020

China’s Central Bank Raises Interest Rates Again

The central bank raised the benchmark one-year bank deposit rate by a  quarter of a percentage point, to 3.25  percent, effective Wednesday. The one-year lending rate rose by the same  amount, to 6.31 percent.

The latest rate increase, announced  on a national holiday when the financial  markets were closed, was widely expected by analysts, some of whom believe it  will be followed by another increase in May.

Raising interest rates should encourage depositors to hold more money in  their accounts and make it slightly  more costly for individuals and corporations to borrow from banks, which would help reduce spending and ease upward pressure on prices.

Wang Qing, an economist at Morgan Stanley in Hong Kong, said in a report released after the rate announcement that the move was possibly a reaction to signs of growing inflationary pressure on the consumer price index in March.

“This rate hike suggests that the March C.P.I. that is to be released early next week may have surprised to the  upside,” Mr. Wang said in his report. He said he believed the consumer price index had risen by  about 5.2 percent in March.

In February, consumer prices in China increased 4.9 percent, driven by an 11 percent rise in food prices, while producer prices rose 7.2 percent, the biggest increase since October 2008.

  Earlier on Tuesday,  the Reserve Bank of Australia kept that country’s interest rates steady and said that inflation had been held in check by “the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets.” 

The European Central Bank is expected to raise interest rates when it meets on Thursday, but analysts predict the Bank of England will leave borrowing rates unchanged.  The Bank of Japan also meets Thursday and will be closely watched to see if it put in place any additional  policy measures in the wake of the disasters.

Beijing has been trying for months to slow economic growth by ordering  Chinese banks to moderate lending and  to hold onto larger reserves.

The government has also tried to ease  consumer price inflation with a rash of  measures, including agricultural subsidies, reducing transportation fees, releasing grain reserves and even pressuring state-owned companies — as  well as some foreign companies — not  to raise consumer prices.

Worried about social discontent over housing prices, Beijing has asked  local governments to find ways to stem  soaring property prices. It even set goals for increases in home prices this  year.

The problems China faces are in  sharp contrast to other parts of the  world. While the United States and  European Union are trying to ramp up  growth, China has been sizzling hot for  much of the last two years, partly because of a huge stimulus  package that went into effect in 2009,  fueling a nationwide housing and infrastructure boom.

Now, Beijing wants to moderate an  economy that has been growing by  about 10 percent a year for the last two years  but also to restructure and rebalance it  away from heavy reliance on exports and investment-led growth. Many economists have been warning that if China  wants to achieve sustainable growth it  needs to encourage more domestic consumption and to ease a widening income gap.

Interest rates are just one tool Beijing is using to get there. Analysts  say the government may have chosen to  act this week because there are growing  signs that inflation may not peak until  May or June.

Still, many economists are confident  China will succeed in slowing the economy down in the first half of this year.  They then expect it to loosen controls in  the latter part of the year and record yet  another year of strong growth — 9 percent or better — with a more modest  level of inflation at around 3 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=1190ad8f0827813a3f0bcf132bfea545

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