Tuesday, April 5, 2011

More Economic Headwinds -- China Raises Rates Again

From Bloomberg:

China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy.

The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People’s Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent.

China -- and to a lesser extent all the BRIC economics -- have been the drivers of this expansion. When the world's economies hit the wall, China engaged a massive stimulus program to prevent a slowdown which was largely successful. However, now the country is facing higher inflation, which they have attempted to limit by first increasing reserve requirements. However, those moves have not been enough; hence the more drastic action of starting to raise interest rates.

However, China is not the only country to raise rates recently:

Vietnam, Taiwan, India, South Korea and Thailand raised benchmark rates in March or April and Chinese officials have also drained cash from the economy by raising bank reserve requirements.