China’s first interest rate increase in nine years may cool its economy without damaging global growth, economists and international policymakers said.
“They are obviously trying to have a moderating effect on their economy,” said Canadian Finance Minister Ralph Goodale. “While they would seek moderation, they are not attempting to impair what is a very buoyant economic situation.”
The People’s Bank of China jolted global markets Thursday by saying it would raise the benchmark interest rates by 0.27 percentage point, to 5.58 percent for one-year lending and 2.5 percent for deposits.
Raising borrowing costs is the government’s latest measure aimed at restraining inflation now running in excess of 5 percent after the world’s largest developing economy grew 9.1 percent in 2003, the most in seven years. China’s economy accounts for about 12 percent of world output, double its input of a decade ago.
“I’m pleased to see them using market-based mechanisms to deal with these concerns of potential inflation,” said Treasury Secretary John Snow. “They’re moving more and more in the direction of more sophisticated market-based management of their economy, and I think that’s a good thing.”
But Tai Hui, an economist at Standard Chartered Bank in Hong Kong, said: “The increase is not enough to cool inflation. China has opened the floodgates to further rate increases.”
Kathleen Stephansen, director of global economic research at Credit Suisse First Boston in New York, predicts an eventual increase of 200 basis points, equal to 2 percentage points.
Until this week, China avoided raising borrowing costs, relying instead on government edicts such as lending curbs introduced in April to slow expansion in industries such as steel and real estate that inflated raw-materials prices and triggered power shortages.
Those measures worked to some extent. Inflation faded to 5.2 percent in September from a seven-year high of 5.3 percent in August.
With monetary policy now playing a part, a further decline in growth is inevitable, said Nicholas Lardy, a China analyst at the Institute for International Economics in Washington.
“A slowing down is now in the cards,” said Lardy, who also expects more increases. “This is the first in a set of moves.”
Stephen Roach, chief economist at Morgan Stanley in New York, agreed there are “other increases to come. This is good news for China, good news in the case for a soft landing,” Roach said.
A weaker Chinese economy may eventually benefit international growth, especially in countries such as the U.S. that rely on foreign nations for much of their raw materials, some economists said.
