Posted on Monday, 7th February 2011 by Charlotte W
The central bank of China raised the one-year lending rate for the third time in less than four months. The 25 basis points increase brings the key benchmark rate to 6.06%, the highest level since October 2008. Despite this latest move, we still think that monetary policy remains accommodative.
As today’s Hot Chart shows, the one-year lending rate remains well below the level of October 2008 relative to non-food CPI inflation. At just under 4%, real interest rates in China remain more than 100 basis points below their decade average of 5.12%.
This means that there is scope for a further increase in lending rates in the coming months accompanied with an appreciating currency. At this juncture we note that the non-deliverable forwards are currently pricing an appreciation of the Chinese currency of 2.5% over the next twelve months. We find this to be rather complacent. The last time China raised interest rates by more than 70 basis points, the CNY strengthened by around 8% vs. the USD in the following year.
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Tags: Raised, Raised Real
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