Expect More Rate Hikes for China
China raised its one-year lending rate a quarter point to 6.06% last night as part of its ongoing campaign to fight inflation. It also raised the interest rate on savings deposits to 3% in an attempt to keep cash on the sidelines.
Consumer prices may have risen as much as 5.3% in January, according to Bloomberg.
China has now raised interest rates by 0.75 basis points. But its clear that the moves so far, which include raising loan reserve requirements for banks, has had little effect on prices in China. India, for instance, has hiked rates by 1.75 basis points.
There should be little doubt that more rate hikes are on the way in China. And we should see China let the yuan increase in value at some point, too. Most of Chinas attempts to control inflation are focused on domestic demand. Yuan revaluation, however, would serve to slow foreign investment in the country, and slow its export economy by making its goods relatively more expensive.
Its easy to see why China is loathe to revalue the yuan and put the brakes on exports. Its also easy to see that interest rates alone will have a limited effect on prices.
Further monetary tightening from China will affect commodity prices on both the perception and the reality that Chinas demand will lessen. I would expect oil to bear the brunt of any
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