China yet again raised rates this morning, this time choosing to hike the reserve requirement ratio on the country’s banks by 50 bps to combat inflation. But this is unlikely to be the last step in China’s tightening cycle, and markets now expect hikes to both the lending and deposit rates at the PBOC.
Most market observers are now anticipating that increases in the central bank’s benchmark one year lending and deposit rates are imminent as inflation levels have remained well above government target levels for five consecutive months and credit levels remain robust (see chart above). Short term SHIBOR levels remain relatively stable compared to the spikes seen in mid February, January and December as this latest round of tightening presumably came as no surprise to short term money markets.
It’s the dramatic increase in loans that China is tying to control, and while it seemed for a little bit they were getting ahead of the issue, now their tightening measures seem to be failing. Therefore, get used to these tightening announcements.
Photo: Waverly Advisors