China continues war on inflation as it raises rates for third time

The 25-basis-point increase in lending and deposit rates underscored China’s quiet confidence that the world’s second-biggest economy is resilient enough to endure tighter monetary policy and is not threatened by the hard landing that some investors fear.

Analysts suggested China was close to, or even at the end, of a cycle of rate rises and the latest move was a pre-emptive strike before another big jump in inflation in data next week heightens depositors’ worries about low yields.

“Today’s rate hike suggests that China’s June inflation could be higher than expected and the second-quarter GDP remains solid, consistent with our expectation,” said Ligang Liu, of ANZ in Hong Kong.

“The rate hike will help The People’s Bank of China to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system.”

Risky assets, particularly those with direct links to China’s growth such as the Aussie dollar, sold off after the announcement, reacting to concerns this latest monetary tightening will choke an already sluggish global economy.

China-watchers couldn’t agree on whether there will be more rate rises in the second half of the year.