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China shocks with first rate rise since 2007

Oct 19 2010 20:48

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Beijing - China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects its concern about rising domestic asset prices and stubborn inflation.

It said it would raise benchmark one-year deposit and lending rates by 25 basis points each.

Oil prices fell, stocks pared their gains in Europe and the dollar rose across the board after the announcement as investors were caught off guard by the tightening step.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

A number of leading economists, including some advisers to the central bank, have suggested the central bank increase deposit rates to keep savers' returns in positive territory.

China reported consumer inflation of 3.5% in the year to August and economists expect that the pace climbed to 3.6% in September.

Still, the increase in rates is surprising given that several top leaders have recently expressed confidence that inflation is under control, and have said that higher rates would potentially suck in speculative capital from abroad.

"They did it now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

China is due to report third-quarter GDP and a suite of economic data for September on Thursday. Economists polled by Reuters expect that economic growth slowed to 9.5% year on year last quarter, down from 10.3%  in the second quarter.

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