Chinese Christmas Day rate rise no present for financial markets
Posted on 26 December 2010 with 3 comments from readers
Burying bad news on Christmas Day has become something of a Chinese habit. Yesterday the People’s Republic did what markets have been fearing for weeks and raised interest rates. With consumer price inflation soaring higher interest rates are inevitable not just in China but all over the world.
One-year lending and deposit rates went up by 25 basis points each to 5.81 per cent and 2.75 per cent respectively. But markets are more concerned about where rates are heading than this relatively small change.
New Year price rises
New Year price hikes on products around the globe are inevitable and likely to be far higher than many forecasters are expecting. Commodity prices of key raw materials soared in 2010 and are now finding their way into finished products.
This is a direct ‘unexpected’ consequence of the artificially depressed interest rates since the financial crisis. Cheap money has been used to speculate in commodities, driving up the price, but then the volume of new money that has been created since then has to find a home.
China was after all the biggest stimulator with its spending package equivalent to half of its GDP in the first half of 2009. That helped to jump start global trade that had gone into cardiac arrest. But the price to pay was always going to be inflation further down the road, and that makes low interest rates unsustainable.
Bubble trouble
The problem is a huge bubble in global stock and commodities markets has formed based on those same low interest rates. If the prospect is now that money is going to cost more – and what are we seeing but that far away in the bond markets of Europe and now China – then the logic is for an unwinding of these bubbles.
Christmas Day is the one date in the calendar when markets are really looking the other way. But they will not take long to catch up with this reality. A Merry Christmas is not likely to be a Happy New Year. Markets have been waiting for a signal to sell-off and this is finally it.
Marc Faber’s warnings about both higher interest rates for 2011 (click here) and a coming 20-30 per cent correction for emerging markets (click here) look particularly precient even by his own exacting standards.
3 Comments posted by readers:
Very worthwhile commentary, Peter.
Marc Faber’s assessments/ predictions are often prescient . . .
Hi, Arabian Money experts!
Is interest rate hike 0.25% in China ,bullish indicator for Silver, Gold and Oil?
Ed Note: Yes we think so – should pull money out of bonds and stocks.
hi peter! Im still learning how does interest rates playing the commodity spectrum. If interest rates rise how does it affect gold and silver?
From what i understand, as interest rates rise it means its more expensive to borrow money, hence a reduction of the velocity of money into the market place to slow down inflation. Which would cause asset prices of housing and commodities to drop.
Please tell me if I got that right.
Another thing i wanted to know is if China raised interest rates is it to the same effect as if Iceland raised rates or US?
thanks!
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