BEIJING, Oct. 19: China’s central bank unexpectedly announ-ced on Tuesday that it would raise interest rates for the first time in nearly three years, apparently in the hopes of dampening inflation and cooling off this country’s hot property market.
The move had an immediate effect on markets worldwide, sending stocks lower on exchanges in Europe and the United States as investors weighed the effect on China’s continued economic growth and its ability to serve as an engine for a global recovery. The major Wall Street stock indexes were down sharply.
Oil prices, also sensitive to the world economic outlook, fell by more than two per cent.
In its announcement, the Chinese central bank said that effective immediately, it would raise the benchmark one-year lending and deposit rates by 0.25 percentage points. Deposit rates will rise to 2.25 per cent, and a key lending rate will climb to 5.56 percent.
The move is the latest indication that China is struggling to fight stubborn inflation, soaring housing prices and an overly buoyant economy that is pumping out exports and resulting in the accumulation of huge amounts of foreign exchange reserves.
Analysts said they were surprised by the decision, because a bank official had suggested just days ago that no rate increase was needed. Still, late Tuesday the bank announced the first rate increase here since 2007. Analysts said it was one of the strongest signals yet that Beijing is having difficulty managing the country’s growth.
But some analysts doubts the move is strong enough to slow things down here.
“This move is symbolically huge, as it is the first rate hike for this cycle,” Mr Dong Tao, a Hong Kong based economist at Credit Suisse wrote in an e-mail after the decision late Tuesday. “Yet it may only have limited impact on the real economy because overall rates are still at excessively low level. This move probably will dampen sentiment in the property sector and equity market in the short run. However, we think excess liquidity will still prevail, if this is just a one-off rate hike.”
In Washington, the Federal Reserve declined to comment, in keeping with its policy of not remarking on the actions of other central banks. Some economists believe that China should raise the value of its currency as a way to fight inflation by making imports cheaper.