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July 23, 2007
China raises interest rates
This is old news, but here it is anyway. On Friday, China announced an increase in their benchmark interest rate. Via the Wall Street Journal:
From Saturday, the benchmark one-year lending rate will rise by 0.27 percentage point to 6.84%, while the benchmark one-year deposit rate will rise by the same margin to 3.33%, the People's Bank of China said. The changes will help "regulate and stabilize inflation expectations, and maintain stability in the price level," the central bank said.
While that language was broadly similar to statements the central bank made announcing rate increases in March and May, the reference to controlling inflationary expectations is new. That may show the central bank wants to prevent the recent surge in food prices from causing broader inflationary pressures, such as a demand by workers for higher wages to compensate for higher food prices.
In addition, the Chinese government cut a tax on interest which increases the effective rate of return experienced by depositors.
Two observations are in order. First, this will not be the end of the rate increases. The temptation to use a phrase like "measured pace" is hard to ignore. Second, as the Chinese continue to slowly let the yuan appreciate and move toward freer capital markets these pronouncements from the People's Bank of China will become as important and interesting for the global economy as press conferences from the ECB and statements from the Fed.
Posted by William Polley at July 23, 2007 08:52 PM
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