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The move had an immediate effect on markets worldwide, sending stocks lower on exchanges in Europe and the United States as investors weighed the effect on China’s continued economic growth and its ability to serve as an engine for a global recovery. The major Wall Street stock indexes were down sharply.
Oil prices, also sensitive to the world economic outlook, fell by more than 2 percent.
In its announcement, the Chinese central bank said that effective immediately, it would raise the benchmark one-year lending and deposit rates by 0.25 percentage points. Deposit rates will rise to 2.25 percent, and a key lending rate will climb to 5.56 percent.
The move is the latest indication that China is struggling to fight stubborn inflation, soaring housing prices and an overly buoyant economy that is pumping out exports and resulting in the accumulation of huge amounts of foreign exchange reserves.
Analysts said they were surprised by the decision, because a bank official had suggested just days ago that no rate increase was needed. Still, late Tuesday the bank announced the first rate increase here since 2007. Analysts said it was one of the strongest signals yet that Beijing is having difficulty managing the country’s growth.
But some analysts doubts the move is strong enough to slow things down here.
“This move is symbolically huge, as it is the first rate hike for this cycle,” Dong Tao, a Hong Kong based economist at Credit Suisse wrote in an e-mail after the decision late Tuesday. “Yet it may only have limited impact on the real economy because overall rates are still at excessively low level. This move probably will dampen sentiment in the property sector and equity market in the short run. However, we think excess liquidity will still prevail, if this is just a one-off rate hike.”
In Washington, the Federal Reserve declined to comment, in keeping with its policy of not remarking on the actions of other central banks.
The decision to raise the rates came after a surge in bank lending in September, reports of higher property prices last month and indications that inflation may have risen sharply in September, after a big jump in August.
Some economists believe that China should raise the value of its currency as a way to fight inflation by making imports cheaper. But the government worries that allowing its currency, the renminbi, to appreciate too quickly could create dislocations in the nation’s huge exports sector, which employs tens of millions of migrant workers.
So China is trying to use other measures that could slow growth, tame lending and encourage consumers to save more money.
While many countries are struggling to find growth, China has been one of the prime engines of global growth.
A powerful economic stimulus package and aggressive lending by state-run banks had helped China recover from the global financial crisis that hit in late 2008. But heady economic growth and large infrastructure and building programs seemed to put too much fire in the economy. And so since early this year the government has been trying to moderate growth and restrain inflation, which has pushed up food prices and created social anxieties.
Beijing is also trying to slow the flow of “hot money,” or speculative investments, entering as investors try to speculate on the anticipation of a strengthening Chinese currency.
Strong exports and speculative capital are flooding the country with foreign money and pumping extra money into the economy. And signals that the Federal Reserve will pump more money into the United States economy is leading to fears that some of this money will flow into China and create even more problems with inflation and asset prices.
Sewell Chan contributed reporting from Washington.
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