Even as the central banks in the US, Europe and Japan continue to pump money into their economies to prevent a credit market collapse, the People’s Bank of China has decided to go the other way. It has raised the one-year deposit rate by 27 basis points, to 3.60% (see Page 19).
Consumer price inflation in China is currently running at 5.6%. Remember that this measure of inflation was in negative territory around three years ago. As in India, soaring prices of food have driven inflation in China. But, unlike here, there are no silly arguments about how food prices are going up because of supply shortages and how the central bank can do nothing about them. Faced with such inflation, a central bank has to keep a tight leash on monetary expansion.
China’s consumer price inflation is now not too far from our own. Yet, interest rates continue to be too low—compare the deposit rate of 3.6% with the 5.6% inflation rate. So, expect more interest rate hikes in China.