International | May 08 2006
By Chris Shaw (Tokyo)
In recent weeks both the Australian and Chinese central banks have lifted official interest rates and so surprised market participants, but the surprise is where the similarity of the actions ends.
DBS suggests the rate rise in China is possibly the more surprising of the two as unlike in Australia where inflation is becoming a greater threat, CPI inflation in the Chinese economy remains below 1%.
Additionally, it suggests the move is questionable from a timing standpoint as the Chinese government has been actively attempting to lift private consumption and higher rates won’t help in this regard, nor will they be good for sentiment given float preparations for some state banks are underway.
It is also a curious move in the analysts’ view as if it is designed to slow down the economy, which is again starting to show signs of overheating as GDP is currently above 10% and the investment-to-GDP ratio stands at 48%, it is not regarded the most suitable course of action.
DBS suggests an appreciation of the currency would have made more sense in terms of putting the brakes on the pace of economic growth, as higher interest rates simply add to the pressure to revalue the currency. In contrast, the experts suggest a stronger currency would achieve both a tightening of monetary conditions and a rebalancing of the economy towards higher domestic demand and lower foreign demand.
Having said that, DBS argues further increases in rates are likely, though these should be modest and so keep official interest rates lower than the strength of the economy should suggest. While higher interest rates encourage saving rather than consumption, DBS suggests if increases in deposit rates lag the increases in interest rates there is unlikely to be any material impact on consumption, which is positive from the point of view of achieving the necessary rebalancing of the economy away from investment-led growth.
