China’s Last Interest Rate Rise For The Year?

Have we seen the last interest rate rise for the year? A consensus is emerging among analysts that we have with the fifth raising of interest rates in eight months.

The Peoples’ Bank of China raised one-year lending rates by 25 basis points to 6.56% from Thursday, while one-year deposit rates went up by the same amount to 3.5%. The end-of-the-liners’ underlying assumption is that inflation will peak in June or July (June’s figure is due next week) and then moderate with falling food prices, letting policy makers switch their attention to the slowing of the economy, possibly heralding stimulative fiscal measures with added investment in property and infrastructure (we continue to be skeptical that those are needed; real negative interest rates, even with the latest increase, will take care of pumping property up).

While we follow the arc of the argument, we are not sure about its timing. Inflation may linger long enough for another step rise in rates to be warranted. Lingering even more menacingly in the background is also the fear that the local government debt bomb might get triggered if rates rise too far, making even more of the debt non-performing. Higher capital reserve ratios for the banks are likely to be doing the heavy lifting for monetary policy for the rest of the year.

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