China Raises Key Interest Rates

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Oct. 20 – China raised key interest rates by a quarter of a percentage point yesterday, sparking worldwide sell-offs in stocks, commodities and emerging-market currencies as investors lowered expectations of Chinese growth.

It was the first time in three years the central bank has raised interest rates. The People’s Bank of China said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5 percent and one-year lending rates to 5.56 percent, effective today.

The timing of the move was unexpected but reflects “the government’s resolve to take further measures to cool the property market and curb persistent inflation,” the state-run China Daily reported an unnamed economist as saying.

China’s rate move could be a sign that the country might rein in a steady but gradual appreciation of its currency against the dollar as rising currency, like higher interest rates, can serve as a brake on inflation. With a rate increase, the government would then not need to allow the currency to rise as quickly.

Many are worried that the unexpected rate hike will dampen the market, especially after the Shanghai Stock Index, which has lagged for much of the year, jumped almost 16 percent in the past nine trading days.

“This is a bucket of cold water for the market,” Zhang Yuheng, an analyst with Capital Securities in Shanghai, told China Daily.

“The hike itself is not a big one, but the psychological impact is big as expectations will grow for more rate hikes,” Zhang said.