Surprised announcement when i had dinner today:

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 percent in the year to August and economists expect that the pace climbed to 3.6 percent 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 percent year on year last quarter, down from 10.3 percent in the second quarter.

yeah that was surpising! damn made my aussie dollar go down! so much for reaching parity with the US dollar ..

It does not seem like a large raise of 25bp.  Is it the first of a string of rises to come.awhile back the idea of opening up a yuan account in hk was discussed.  Might be worth considering again.

the market did not correct too much and many people take today's market correction as an opportunity to buy. i wonder do people ever think the size of QE2 would be less than people expected? and seems many countries have started using different tools to avoid hugh foreign inflows, this make the coming G20 meeting more interesting now - let's see what will happen.

this may be a dumb question but i'm fairly illiterate in economics, so when you say the dollar rose across the board you mean USD?

so they raised the interest rates to counter this?

I guess ultimately what i'm asking is how this will affect the exchange rate.

yes the USD rose after the news but seems it has already settle down.

no, the rising interest rate is to curb the inflation and try to cool down the economy. because the sharp falling of USD, many emerging markets have used different ways to slowdown the foreign inflows and this has already become a hot topic to discuss in the coming G20 meeting.

It seems china keep speculators out through capital controls so eve though demand for yuan is created through higher interest rates there is no way to get invested. This will keep yuan from appreciating any more than te government want.  Other courtier look like try want to cut currency speculation such as brazil which just put in a tax oninflows and Thailand also.  So the world is trying to rationalize currency which is a good idea.  Unfortunatley the speculators will continue to operate as so far the responses globally are totally uncoordinated.  Economic policy is being fought globally with thespeculators taking a big share of the disconnect.   That ultimately drives up the cost for all of us and makes the economy suffer

yes. i agree with what you said. it is lucky that yuan is still capital control, so the impacts from foreign inflows will be less than other emerging markets, but if USD is still depreciating, than this will make us and the global economy get suffer. the USD has already become like "my currency, your problem" now and i don't understand why US still say they want strong USD but it has already significantly.

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G20 Rebuffs US Call for Limits on Currencies, Trade
| 21 Oct 2010 | 12:32 PM ET

G20 officials are unlikely to reach an accord rejecting currency devaluations and capping current account balances, an informed source said on Thursday, after U.S. proposals ran into stiff opposition.

The swift rebuff of a U.S. call for numerical targets for "sustainable" trade surpluses and deficits underscored the difficulties facing Group of 20 finance ministers gathering in South Korea as they try to defuse tensions over currencies and economic imbalances.

The G20 source, who has direct knowledge of deliberations at the meeting, said the proposals had not found favor with India, China and other emerging economies, or even the likes of Germany, which has a large current account surplus.

In an interview with the Wall Street Journal, U.S. Treasury Secretary Timothy Geithner called for an agreement on exchange rate policy "norms."

"Right now, there is no established sense of what's fair," he told the paper. "We would like countries to move toward a set of norms on exchange rate policy."

Washington is also floating the idea of specific targets for current account balances. This would build on a G20 pledge a year ago to tilt growth away from exports in fast-growing surplus countries, such as China, and to boost savings in rich deficit economies, including the United States.

"We are exploring whether we can agree to commit to keep the external imbalances to levels that are more sustainable," Geithner said.

The G20 source said the drafting of a communique would only begin late on Friday after a first round of meetings between finance ministers and central bank governors in Gyeongju.

"If the U.S. persists with that line, we will oppose it," he said, adding that the final communique would make a rather "subdued" reference to currencies and current account balances.

French Economy Minister Christine Lagarde said coordination on currency policy was lacking and that Asia had a vital role to play.

"We can see there are imbalances, that coordination is at times lacking on policy," she said in Paris.

"Let's All Live in Peace"

Diplomats said Washington was proposing that countries should aim to limit their surplus or deficit on the current account — the broadest measure of trade in goods and services — to 4 percent of gross domestic product.

But German Economy Minister Rainer Bruederle said he was opposed to numerical goals.

"Macroeconomic fine-tuning and quantitative targets are not the right approach in our view," Bruederle told Reuters in Berlin before leaving for the G20 talks.

Russian deputy finance minister Dimitry Pankin was also sceptical about the U.S. initiative.

"The United States will try to put the question of exchange rates and current account balances at the top of the agenda, to try to press China to make some commitments on this issue. In my view it is unlikely that they will succeed," Pankin said.

"Most likely, there will be some general words, along the lines of 'let's all live in peace'. I do not expect much success in this sphere," he told reporters.

An Indian finance ministry official gave equally short shrift to Geithner's idea of numerical goals.

"I do believe that this has to be looked at more fundamentally. By artificially linking current account deficit levels to the GDP you are merely skimming the surface. I am not sure that this will be supported by very many emerging economies," the official told Reuters.

Blame Game

Pankin criticized Washington for piling pressure on emerging markets to lead a rebalancing when it was loose U.S. policy settings that were sending capital pouring into developing economies, generating pressure for their exchange rates to rise.

"We think that such policies will not come to any good," he said. Things would not turn out well unless the United States cut its budget deficit and tightened monetary policy, he added.

His forthright remarks contrasted with the emollient note on exchange rates struck by Geithner, who hopes that, by preaching currency cooperation, he can coax China into allowing the value of the yuan to rise more quickly.

Major currencies were "roughly in alignment now," Geithner told the Wall Street Journal.

The Treasury chief repeated his view that the yuan, also known as the renminbi, was significantly undervalued. But he said that would be corrected over time if the brisker pace of appreciation witnessed since September were sustained.

"I China knew that if it moved more rapidly, other emerging markets would move with them, it would be easier for them to move," Geithner said.

Countries from Brazil to G20 host South Korea are loath to allow their exchange rates to rise for fear of losing competitiveness to China. For its part, Beijing is adamant that the yuan's rate of climb must be gradual.

"If the renminbi exchange rate is not stable, companies will not be stable, employment will not be stable and society will not be stable," the People's Daily, the mouthpiece of the ruling Communist Party, said in an editorial on Thursday.

The task for finance ministers and central bank governors, at a two-day meeting starting on Friday, is to paper over such tensions so they do not mar a G20 summit next month in Seoul.

[ Last edited by  haroldla at 22-10-2010 01:27 ]