The People’s Bank of China (PBoC) hiked the one-year deposit and lending rates by 25 basis points (bps) after the local markets closed yesterday. In contrast with consensus, RGE had been foreseeing a modest hike to the lending and deposit rates—a stance we reaffirmed in our most recent China Monthly—despite signals that the central bank was content to tighten credit conditions with quantitative measures. (On October 11, the PBoC initiated a temporary required reserve ratio [RRR] hike of 50 bps for the largest state-owned banks.) Following the interest rate hike, one-year deposits will pay 2.5% starting today, when the benchmark one-year lending rate will increase to 5.56%. The 25-bp move seems to signal the end of the abacus-based 27-bp hikes we had come to expect from the PBoC.
In the past, Chinese interest rates have had little effect on consumer prices, and today’s 25-bp hike will not change that equation. China’s inflation is currently the product of a food price shock, which should dissipate in the coming months as demand pressure from the holiday season lessens and the autumn harvest proves less disastrous than expected. Moreover, Chinese authorities may continue selling some of their food stocks in the domestic market, as they have for edible oils. Weak global demand has directed more Chinese production toward the domestic market. The resulting jump in the domestic supply of consumer goods and the discounting needed to move some of the goods—not to mention the aggressive expansion of capacity in some sectors like automobiles—will provide deflationary pressures next year to partially offset rising demand-side pressures from wage increases.
For more on the potential effects of the rate hikes, read “China’s ‘Surprise’ Rate Hike: Another Step Toward Normal,” available exclusively to clients.
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