Just as I pressed send in my prior mail China hiked interest rates to the surprise of the market, as is the PBOC's way.
This is not a shock to the market. Interest rates need to rise to effectively slow the Chinese economy and make it worth while for savers to keep their money in the bank rather than invest it in China's overheating property sector. Rates are still at a low level even after this hike, and more will be necessary in the coming months.
The move has impacted asset markets, the Aussie dollar has fallen due to its proximity to China and reliance on Chinese growth to fuel its exports sector. It dropped 40 points on the news to 1.0040.
Stocks are relatively unchanged, as is oil.
We believe it will be difficult for them to muster much bullish sentiment today, as it shows that the Chinese authorities are committed to keeping a lid on inflation. However, they are embarking on a very slow, steady hiking cycle and its worth pointing out that real interest rates in China are still negative.
That's 2 months and 2 hikes- will this be the pattern of PBOC in the future - we shall have to wait and see.
At this stage of China's tightening cycle today's hike shouldn't really be that much of a surprise to the market and should only have a limited effect on asset prices.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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