Here’s why China just hiked its short-term lending and deposit rates by 25 basis points, in a single picture.
Inflation has been rising even in spite of what appears to be a successfully executed ‘soft landing’ for the Chinese economy, where growth has slowed from its torrid 10%+ rate, but not by too much.
The government wants to further clamp down on inflationary pressures, and believes its economy is growing sufficiently strong to withstand the stronger monetary headwind that higher interest rates create.
Some analysts expect even more rate hikes in the pipeline given that inflation could rise even higher this year:
The index might reach 4 per cent in October and start to decline in November, Lu Zhengwei, chief economist at the Industrial Bank, said.
Matthew Circosta, economist at Moody’s Analytics in Sydney, said food prices would continue to be the main cause of inflation. “Higher food prices will indirectly add to production costs and raise inflation expectations,” he said.
Wang Tao, head of China Economic Research at UBS Securities, also said the CPI will likely peak in October at about 4 per cent.
Given that China has set a target of keeping inflation below 3 per cent for this year, more monetary tightening could come, analysts said.