China may limit interest-rate increases for the rest of this year as Premier Wen Jiabao bets that a slowing economy will help tame inflation after five moves since mid-October.
A quarter-point boost to one-year lending and deposit rates was announced late yesterday, effective from today. That may be the last for 2011, according to JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Merrill Lynch. Nomura Holdings Inc. predicts one more move, this quarter.
The ruling Communist Party may delay further increases because of signs of weakness in manufacturing and export demand and to avoid attracting more speculative capital to the fastest- growing major economy. The central bank moved before a report that may show consumer prices rose more than 6 percent last month, the biggest gain since July 2008 and a likely peak for this year, according to JPMorgan.
“This is likely to be the last hike of the year,” said Yu Song, a Hong Kong-based economist at Goldman Sachs Group Inc., citing a risk of “hot money inflows” and “the negative impact on real economic activities.” Yu and colleague Helen Qiao were jointly ranked the top forecasters of the Chinese economy in a Bloomberg analysis of estimates over the two years through May.
The Shanghai Composite Index slid 0.3 percent as of 10:11 a.m. local time today. Twelve-month non-deliverable yuan forwards were little changed at 6.3910 per dollar, a premium of about 1.2 percent to the spot rate.
Higher rates may help to curb consumer expectations that inflation will accelerate after a surge in pork prices drove a 12 percent jump in food costs in May from a year earlier. Slower economic growth and more favorable year-earlier comparisons may help to limit price gains in the second half.
The one-year lending rate will increase to 6.56 percent, the People’s Bank of China said on its website yesterday. The one-year deposit rate rises to 3.5 percent from 3.25 percent, while demand deposit rates are unchanged.
London-based Capital Economics Ltd. said that benchmark rates remain low “relative to the pace of economic growth” and predicted more gains in lenders’ reserve requirements as the central bank seeks to control liquidity. Bank of America said rate increases may resume in 2012.
Xia Bin, an academic adviser to the People’s Bank of China, said yesterday’s move was “not enough.”
Signs of Slowdown
Signs that the economy is cooling include a slide in a manufacturing gauge to a 28-month low in June. Export orders and output grew at a slower pace, according to the purchasing managers’ index released by the statistics bureau and China’s logistics federation.
Stocks and commodities fell yesterday on prospects for weaker global demand after the central bank moved and Moody’s Investors Service cut Portugal’s debt rating to junk.
China’s increase takes effect on the day the European Central Bank is expected to raise its benchmark rate a quarter point to 1.5 percent. Elsewhere, emerging markets have outpaced advanced economies in raising rates, with South Korea, India, Chile, Brazil and Poland doing so in the past month.
In India, the repurchase rate is 7.5 percent, while the U.S. Federal Reserve has indicated no imminent plan to lift its benchmark from near zero.
Premier Wen said last month that the government may fail to meet a full-year inflation target of 4 percent after the rate was 5.2 percent for the first five months.