Despite rate hike, markets keep buoyant

08:35, February 09, 2011      

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China's central bank raised interest rates by a quarter percentage points Tuesday, in an effort by Beijing to rein in surging prices and tame a high-flying property market.

However, China's second interest rate increase in just over a month did not dent stock market optimism worldwide, with many of the world's leading stock indexes holding at levels not seen since the summer of 2008, before the collapse of Lehman Brothers triggered the biggest bear market since World War II.

In a somewhat unexpected move, the People's Bank of China lifted its benchmark one-year deposit rate to 3 percent, and the one-year lending rate to 6.06 percent, said an announcement on the bank's official website.

The rate hikes are designed to keep price increases in check across the board, make sure China's economic growth is running at sustainable levels and promote savings instead of risky speculative investments, analysts say.

Tuesday's rate increases came at the end of China's Lunar New Year festivities – Chinese markets are due to open again on Wednesday -- and follow last Christmas Day's surprise rise.

Beijing faces a daunting job to control inflation, which is hurting ordinary residents a lot. The consumer price index, or CPI, rose 4.6 percent in December after jumping to a 28-month high of 5.1 percent in November.

Some Chinese analysts have predicted inflation could have reached a new high in January, as Chinese people were on a buying spree before the arrival of the Spring Festival holidays, which ended Tuesday.

The main worry in the global markets is how much growth will slow as China tightens monetary policy -- after all it's been rapid Chinese growth over the last few years that helped prevent a global recession from turning into a depression.

World stock markets took a small knock in the immediate aftermath of the rate hike but the optimism that has been evident in markets so far this year supported markets in Europe and the U.S.

"We think markets are right to have taken China's latest decision to raise interest rates in their stride," Mark Williams, senior China economist at Capital Economics, was quoted by The Associated Press. "The announcement has caused some jitters about the impact tightening will have on growth but these concerns should not be overplayed as the rate hikes should not do much to slow growth."

The world's second-largest economy saw its growth expand by 9.8 percent in the fourth quarter of last year, climbing from 9.6 percent in the third quarter. Its GDP rose 10.3 percent last year.

In Europe, the FTSE 100 index of leading British shares closed up 40.30 points, or 0.7 percent, at 6,091.33 while Germany's DAX rose 39.62 points, or 0.5 percent, at 7,323.24. The CAC-40 in Paris ended 17.47 points, or 0.4 percent, higher at 4,108.27. In the U.S., the Dow Jones industrial average, which has ended higher for six straight sessions, ended up 71.52 points, or 0.59 percent, at 12,233.15.

China's interest rate hike came amid mounting speculation that other central banks, including the European Central Bank and the Bank of England, will lift borrowing costs earlier than previously thought as inflation has spiked above target levels.

"The risk of rising inflation cannot be neglected because major economies are expected to shore up their growth by maintaining an easy monetary stance. As a result, a large amount of capital flows into emerging economies," the PBOC said in a report published on January 30, before the Spring Festival holidays.

By People's Daily Online


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