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China’s central bank raises interest rates

Marketplace Staff Oct 20, 2010
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China’s central bank raises interest rates

Marketplace Staff Oct 20, 2010
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TEXT OF INTERVIEW

JEREMY HOBSON: Today, China’s central bank raised interest rates for the first time in nearly three years. The official explanation: To soak up excessive market liquidity. Translation: Time to slow down the economy’s double digit growth. For more on this,
we turn to Neil MacKinnon, an economist at VTB Capital. He joins us live from London. Good morning.

NEIL MACKINNON: Good morning.

HOBSON: So, is that the official explanation for the interest rate rise? It’s time to cool off China’s hot economy?

MACKINNON: Well, certailly the interest rate increase was unexpected in Royal’s finacial market when it was announced. But during the course of this year the Chinese authories have taken various measures like increasing reserve requirement ratios in order to cool down the hot spots in the real estate market. They’ve been concerned that there might be, or there is, a bubble in that sector. And so, during the course of the year they’ve been taking these measures to cool down bank lending and to cool down the very hot rate of growth that we’ve seen in the Chinese economy generally.

HOBSON: Now, it may be a good thing in the long term if it’s indeed going to pop a bubble, but the global stock market not very happy about it today. I want to ask you about the currency market, though. We’ve been talking about this global currency war that may or may not be going on. Everybody wants to have the lowest valued currency so they can boost their exports. What does this do on that front?

MACKINNON: Well I think that during the course of this year the markets have been focusing on potential tensions between America and China, particularly over trade and particularly those regards to feeling that China should do more to make its currency policy more flexible and push the value of the Renminbi higher. To some degree China’s been playing ball with America on all of that. The Renminbi has been going up but whether it goes up much further right this minute remains to be seen, certainly higher interest rates and principles should push the currency higher. But some in the market are taking the view that by raising interest rates this takes the heat, if you like, off using the currency as one of the main measures to cool down the economy. But my guess is these currency wars are not going to go away for as long as the American dollar remains weak. It’s going to create lots of problems particularly in Asia and elsewhere.

HOBSON: Okay. Alright. Neil MacKinnon, thanks so much.

MACKINNON: Thank you.

HOBSON: Neil MacKinnon, economist at VTB Capital.

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