By: Dr. Mike Campbell
In a move that seems to have caught most financial analysts by surprise, the Bank of China has increased its rates for the first time since the onset of the global financial crisis in 2007. The People’s Bank of China has increased the one-year lending rate from 5.31 to 5.6% and the one-year deposit rate has increased by a quarter of a percent to 2.5%.
The Chinese authorities are trying to tackle the problem of increased inflationary pressure and to try to take the heat out of the property market which many analysts already style as a bubble. They are also seeking to rein-in surging bank lending – a problem that many other major economies would dearly love to be faced with.
The move led to falls on major stock exchanges around the world. The Nikkei was down by more than 2% before recovering somewhat, to close at 9382, down 1.7%.
In America, the Dow fell by 1.5%, closing at 10978; it had not been helped by negative sentiment in the banking sector after Bank of America posted a $7.3 billion loss for Q3, after it made provision for debit and credit card losses.
Analysts are concerned that the higher Chinese rates might lead to a decreased rate of growth in China with a knock-on effect on demand for raw materials. This sent mining stocks lower. The move also caused the value of the US Dollar to spike since it is always seen as a safe haven in times of uncertainty.
However, the rise was short-lived, presumably as it dawned on the market that the Dollar has problems of its own right now. The gains seen yesterday were erased overnight and the Dollar has resumed its downwards trajectory against the Yen.