China – gradual tightening with CPI and PMI data

The People’s Bank of China (central bank) continued its tightening of monetary policy with another hike in interest rates. Both the lending and deposit rates increased by 0.25% and are now at 6.06% and 3% respectively.

Globally this was expected although there was some knee-jerk reaction with the sale of growth assets such as equities, copper and the Australian dollar. The reason for this is that if China faces a slowdown in its economic activity it is likely to affect the Australian commodity and ultimately their dollar as China cuts back on purchases from Australia. However the currency make up what it had lost earlier in the week. At this stage the increase in China’s CPI and the small reduction in manufacturing production, as indicated in the latest China PMI data, has warranted a tightening action.



PMI

Although you might not have come across this in economics textbooks, economists do use this indicator in forecasting inflation. The Purchasing Managers Index (PMI) is an indicator for economic activity. Roughly speaking it reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

The PMI report is an extremely important indicator for the financial markets as it is considered the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to.

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