October 19, 2010

China to Raise Interest Rates

First time in three years for action taken to control prices

In a surprising move, The People’s Bank of China announced Tuesday that it would raise interest rates for the first time in three years. The benchmark deposit and lending rates will go up by 0.25%.

According to a report in the Financial Times, the one-year lending rate will rise from 5.31% to 5.56% on Wednesday, and the one-year deposit rate will rise to 2.5% from 2.25%. This is the first reversal of rates since the numerous cuts the central bank had put in place between September and December of 2008, and the first rate increase since December of 2007.

China had funded a massive economic stimulus to counter the financial crisis, and has been concerned recently with keeping its burgeoning economy from overheating. Its action fuels speculation that third-quarter growth and inflation numbers for September, to be released later this week, will be higher than expected. In August, inflation hit 3.5%, which tops the government’s target for the year of 3%.

News of the increase sent gold producers, Canadian stocks and dollars, the Aussie dollar, Chicago grains and soybeans, and European markets falling; according to a Bloomberg report, the rise in rates in China dampened the appeal of gold as an alternative investment. According to Bloomberg data, gold companies constitute 11% of Canadian stocks by market value. Silver and copper also fell; China is the world’s biggest consumer of copper, according to another Bloomberg report, and efforts to rein in its raging economy have discouraged basic resources and commodities overall. Crude oil also suffered, losing the most it has in seven weeks at the news.

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