Instant View: China raises rates, steps up inflation fight

LONDON (Reuters) – China’s central bank raised interest rates for the second time this year on Tuesday, redoubling efforts to cool stubborn price pressures.

Benchmark one-year deposit rates will rise 25 basis points to 3.25 percent and one-year lending rates 25 basis points to 6.31 percent, the People’s Bank of China said in a statement on its website. The rises take effect from April 6.

Following are analysts’ comments on the move.

ZHU BAOLIANG, CHIEF ECONOMIST AT GOVT THINKTANK STATE INFORMATION CENTER:

“The policy-setting is tight but not so tight given the real interest rate has been negative for a long time. We expect one or two more interest rate rises by the year-end.”

“Inflation in April should be near 5 percent or slightly higher than 5 percent. We expected inflation to peak in June or July.”

SEAN CORRIGAN, CHIEF INVESTMENT STRATEGIST AT DIAPASON COMMODITIES MANAGEMENT IN SWITZERLAND

“The market’s quite sanguine about it… For now, people have become accustomed to this drip feed.

“Broader than that, there’s a degree of complacency about China’s chances of achieving a soft landing. But conversely, there’s also a lot of commentary trying to suggest that the Chinese are somewhat near the end of this procedure, rather than only halfway through.”

QING WANG, ECONOMIST WITH MORGAN STANLEY IN HONG KONG, IN A NOTE TO CLIENTS:

“While we have been calling for two more rate hikes for the rest of the first half of the year, the timing … is earlier than we have expected, as we forecast that the rate hike would be made in May-June when the headline inflation rate is expected to pick up significantly.

“This rate hike suggests that the March CPI that is to be released early next week may have surprised to the upside. Our current CPI forecast is 5.2 percent y/y for March.

“It also suggests that Chinese authorities are confident in the sustainability of underlying growth momentum.

“This rate hike underscores once again the front-loaded (nature of) monetary tightening, which, together with the rather substantial slowdown in money and credit growth so far this year, bodes well for peaking of the headline inflation rate by mid-year, in our view.”

CALLUM HENDERSON, GLOBAL HEAD OF FX RESEARCH, STANDARD CHARTERED, SINGAPORE:

“The typical reaction to this is a mildly negative one in Asian currencies and risk currencies in general. Though the tightening has progressed gradually, we could see a knee-jerk negative reaction therefore in G10 and emerging market currencies like Aussie dollar and Asia ex-Japan.

“Taking a step back, Asia is refocusing on inflation and the Japan earthquake concerns are moderating … The real money community may use this as a buying opportunity.”

XU BIAO, ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN:

“The March inflation figure must be very high, for which the central bank has to increase interest rates. It is an aggressive move, and the central bank is acting more aggressively than the market had expected. The latest interest rate rise, although at only one quarter point, may hurt investor confidence and the real economy quite significantly.

“More importantly, it is not the end of China’s monetary policy tightening.”

ANDREY KRYUCHENKOV, ANALYST AT VTB CAPITAL

Metals markets didn’t move much following the news, he said.

“It was partially priced in but this will keep pressure on copper. We may see copper coming off later today when actual trading (at the London Metal Exchange) starts.”

MARK WILLIAMS, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, LONDON

“The timing would have caught some people by surprise but a lot of people expected China to raise rates some time in the second quarter so it is not completely out of the blue.”

“Interest rate hikes in China do not have a direct impact on the economy because they are very low and it is rather the amount of credit that has an impact.”

“The usual pattern is that commodities weaken and that equities often but not always take a hit in the rest of the world.”

PIN RU TAN, EMERGING MARKETS FOREX AND RATES STRATEGIST, ROYAL BANK OF SCOTLAND, SINGAPORE

“Asian currencies will have to rise more in the longer term as central banks are expected to keep raising interest rates and to allow more appreciation in their currencies to fight inflation.”

BENOIT ANNE, HEAD OF EMERGING MARKETS STRATEGY, SOCIETE GENERALE:

“This is ultimately good news because it reduces the risk of policy error in China that markets were getting nervous about. It reduces the danger of Chinese policymakers being too dovish and shows them addressing the mounting inflation risk which is a massive tail risk for emerging markets. We will see a few more hikes as China needs more monetary tightening.”

“Ironically, markets may react negatively in the short term as a Chinese rate hike is associated with the retrenchment of global liquidity and syncs with the debate we’re now having about the appropriate exit strategy for economic stimulus. But this is a positive move from an emerging-markets standpoint.”

ALLAN VON MEHREN, CHIEF ANALYST, DANSKE BANK, COPENHAGEN

“We did expect a rate hike in April so it’s not a complete surprise. They are raising rates to stem the inflationary pressures in the economy. We expect another two hikes of 25 basis points each this year. We are already seeing a slowdown in the Chinese economy but they need to raise rates a couple more times.

“They will still use reserve requirement increases but they also need to raise rates. I think they will use different tools (to tackle inflation).”

JAMES SHUGG, INTERNATIONAL ECONOMIST AT WESTPAC, LONDON

“This reflects the ongoing concerns that Chinese authorities have about overheating in some sectors of the economy. Some of the sectors are growing at double digits. The hike also reflects the issue of an undervalued currency. We expect the lending rate to be raised to 6.56 percent by June and thereafter in the second half to see some soft patches to emerge in the Chinese economy.”

(Reporting by Asia and London market desks, compiled by Patrick Graham; [email protected]; +44 207 542 4441)

Instant View: China raises rates, steps up inflation fight