China’s decision to raise interest rates for the first time since 2007 surprised us given that GDP growth has been slowing and producer price inflation has shown signs of peaking.
It shows that policymakers have been encouraged by some better-than-expected economic data in the last two months. They are no longer worried about a sharp slowdown in growth, giving them scope to respond to public concerns about negative real deposit rates.
China’s move means one-year benchmark deposit and lending rates will rise by 25 basis points to 2.50 per cent and 5.56 per cent, respectively, from Wednesday. However, we don’t think this modest rate increase is likely to harm the real economy, given its solid fundamentals. Investment will continue to be underpinned by 100,000 ongoing infrastructure projects and an accelerated public housing construction programme. Meanwhile, consumer spending should be boosted by higher deposit rates.