Except For Timing, China Rate Hike Comes As No Surprise

Surprising the markets, especially given that China is still celebrating the Lunar New Year holiday, the People's Bank of China moved today to raise their benchmark deposit rate, effective tomorrow.  This comes as the 3rd such rate increase in four months, and analysts expect that more will be forthcoming, as rising food prices and inflationary pressures bear down upon the second largest economy in the world.  According to the press release, the 1-year deposit rates will rise by .25% to 3%, with a corresponding rise in the 1-year lending rate to 6.06%.

In December 2010, consumer prices rose 4.6%, while the Chinese economy expanded nearly 10% in the year's last quarter, at a pace faster than that of the previous quarter.  Also in December, it was reported that the annual inflation rate had slowed to 4.6%, but analysts expect that January's numbers will have risen as global food prices soared to record highs.  According to one analyst from UBS Bank, 2011 inflation is expected to average 4.8%, while an analyst for Deutsche Bank expects inflation to run slightly higher at 5% for the year.   The Chinese government, meanwhile, has set 4% inflation as their goal.

Food prices and energy costs are being driven higher by increased demand from emerging countries such as China, which in turn drives inflation higher.  And, not just in China, but throughout the western economies; ultimately having a detrimental affect on the global economic recovery.  Included among those western economies is the U.K. and the Eurozone, and their respective central banks which are attempting to hold inflationary pressures at bay.  However, they may eventually have no choice but to raise interest rates, even before they've been restored to economic health.

With Australia being a key trading partner to China, it was no surprise that following the announcement, the Australian Dollar slipped against the U.S. Dollar; AUD/USD was trending lower at 1.0130.

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