Yes, China raised rates again yesterday, but this wasn’t exactly a surprise. If you’ve been paying attention in class instead of playing Moviecat on your iPhone4, then you’d know that rates hikes are a developing trend by the People’s Bank of China (PBoC)!
Yesterday’s rate hike marked the third rate increase since last October, as Chinese officials are becoming more and more concerned about rising inflation. These rate hikes, in addition to increases in bank reserve requirement ratios, are all part of the PBoC’s shift towards a more prudent monetary policy stance.
In fact, analysts were actually predicting that the PBoC would continue to raise rates in 2011, with yesterday’s hike the first of four increases predicted for the year. In addition, the central bank is expected to implement a run of reserve ratio increases as well.
I’m sure there are plenty of traders out there who were surprised to see that the markets didn’t react to this week’s rate hike as wildly as they did in the past. To put things into perspective, let’s take a look at how the Aussie dollar reacted to the Chinese rate hikes in October and December 2010.
Back in October, when China increased its interest rates for the first time in almost three years, the Aussie dropped over 2% in value against the USD. When China raised rates again in late December, it fell once more, but this time by just 0.03%. Yesterday, the Aussie surprisingly gained 0.07%. It doesn’t take a rocket scientist to see that these Chinese rate hikes are losing their ability to shake the markets up.
One possible reason why the Aussie didn’t dip yesterday is that the threat of slower growth doesn’t seem to be affecting China’s demand for Australia’s goods much. As a matter of fact, China’s strong performance is one of the reasons why the Reserve Bank of Australia (RBA) didn’t sound so worried about the economic impact of the floods in its last interest rate decision.
Another reason is that most market participants probably read my recent article predicting another Chinese rate hike by the end of January or early February. Ha! I’m kidding, of course. But, just the same, traders must’ve seen this rate increase coming and priced it in way ahead. Because of that, when the actual rate hike took place, bulls and bears were nowhere to be found and all that was left were crickets.
Besides, thanks to the ongoing concerns about global inflation, a tightening move by one of the world’s largest economies was welcomed with open arms. As I mentioned before, booming economies have been taking the blame for skyrocketing commodity prices so market gurus became more forgiving of China’s move to cool demand.
Looking ahead, I dare say that China still has a bunch of rate hikes up its sleeve as it attempts to keep its economy from exploding. With close to double-digit annual GDP growth and core inflation near the upper half of PBoC’s target range, the implementation of further tightening moves is as sure as the stars shine through from the heavens… as long as the river runs to the sea… Oops, I got carried away there. Must be the pre-Valentine’s vibes!
Come to think of it though, China seems to have a penchant for hiking rates on special occasions. They did so during Christmas Day and also on the eve of the Lunar New Year. Valentine’s Day is just a week away, so should we expect another tightening move then?