China increases interest rates

China’s central bank raised its benchmark rate by 0.25% – first increase sine 2007. It is expected that this will be the first of a series of rate increases. As usual the Chinese central bank was quite sheepish on the reasons for the interest rate move but the following are believed to be the rationale:

1. Annual increase in property prices was 6.2% and rising
2. Annual inflation in August was 3.5% and rising
3. Higher interest rates might check the gradual appreciation of its currency against the dollar seen recently. A rising currency, like higher interest rates, serves as a brake on inflation – thus a rate increase means it wouldn’t need to allow the currency to rise as quickly.

However although financial markets might be scaling back expectations about China’s growth prospects it is encouraging that China is confident enough in its economy to slow things down.

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