China’s central bank raises interest rates to tighten grip on liquidity

08 Jan 2010

1

In a move that came as a surprise New Year's gift China's central bank on Thursday raised the interest rate on its three-month bills for the first time since mid-August, tightening its grip on liquidity, after it promised to keep credit growth in check a day earlier.

The move which came amid the biggest weekly net drain from money markets in 11 weeks, raised concerns that stronger measures to cool growth and control inflation may be in the offing, such as raising benchmark lending rates.

The prospect of a tougher policy regime weakening appetite of the world's third-largest economy for steel, copper and other resources sent offshore non-deliverable interest rate swaps up across the board hitting a range of commodities.

But according to analysts the move should be considered as an effort by the People's Bank of China (PBOC) to balance out the flow of liquidity into the system, and particularly to discourage banks from the year-opening rush to lend as in 2009.

According to economists however, there was not much to read in the one-off case.

They say monetary accommodation would be very much in place and though overall bank lending would likely fall this year from that of the last it was too early to talk about a withdrawal.

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