Despite rising inflation, the PBoC has decided not to hike interest rates, instead hoping the increased reserve requirements announced late last week will stem the tide of credit-induced inflation.
“The People’s Bank of China is hesitating to raise interest rates despite increasingly worrisome inflation, apparently due to concerns that higher rates would attract inflows of speculative capital.”
“If inflation keeps accelerating, however, higher interest rates appear inevitable, and it’s just a question of how the PBOC can mitigate resulting inflows.”
“Barring a surprise decline in inflation, China before long will be forced to reach for the interest-rate lever. In October, when rates were raised for the first time in three years, PBOC officials said one reason for the hike was the need to address negative real returns on bank savings.
That problem has only intensified. With November’s consumer price index having risen 5.1% from a year earlier, and the one year time-deposit rate at 2.5%, savers would have made a real return of negative 2.6% over the past 12 months.
That helps explain why authorities are having a hard time reining in property prices, as savers scramble to find alternatives to bank deposits that won’t lose them money.
Nor can authorities continue to write-off inflation as merely a weather-induced blip in food prices. For the second consecutive month in November, non-food price gains accelerated, showing that inflation pressures are spreading.”
Commodities jumped higher on the news and the TSX opened up on the day. It remains to be seen whether the reserve requirement changes will be enough to ward off rising inflation. For the time being, the single largest driver of the industrial commodity bull market remains intact.