Tuesday, February 8, 2011

BREAKING: China Raises Interest Rates

China's central bank, the People's Bank of China, has announced that it is raising the key lending rates by 25 basis points. The benchmark one-year deposit rates was raised by a quarter of a percentage point to 3 percent, and its one-year lending rate by a similar amount, to 6.06 percent.

China's official reported inflation rate is 6.0%, in reality it is likely much higher.

Thus, a 25 basis point hike will result in nothing but stagflation, i.e., a slowing economy and inflation. The rate hike will slow the distorted economy because there will be less money being printed, but a 25 basis point rate hike is not enough to stop the printing completely, so price inflation will rage on--especially since China also continues to manipulate the value of its currency down, from free market levels, versus the dollar.

1 comment:

  1. The weird thing is that gold and commodities moved up higher. It seems like it validated inflation and the market thought that the rate rise was insufficient. This probably means that inflation is still going strong, but it's not going as strong. Perhaps that's what stagflation means?