China Raises Rates for Third Time in Four Months

by Marilou Moursund on February 8, 2011

in Commodities,currencies,Foreign Markets,Geopolitical,inflation/deflation

The People”s Bank of China, or PBOC, in the one year lending rate today taking it from 5.83% to 6.06%.  Many emerging economies are concerned about the long term affects of food and commodity inflation.  Fromt the linked WSJ article:

“China and other large emerging nations are using a panoply of policy measures to battle inflation fueled by a global rise in food and commodity prices, but few have gotten a firm grip on the problem, and more interest-rate increases are anticipated. Emerging nations also have seen a surge in investment from abroad in property and other assets, as interest rates in the U.S., Europe and Japan remain at near-zero levels. In Asia, several currencies have rallied to multiyear highs, and authorities in South Korea and Malaysia have intervened in foreign-exchange markets to slow the appreciation of their currencies.”

We think that these high growth economies are being prudent in trying to gradually deflate a bubble rather than letting it get so large that it bursts.  However, it does add to volatility in the emerging markets.  In addition to the threat of inflation, emerging markets were hit last week with the political instability in Egypt, and emerging market ETFs saw their largest weekly outflow on record of $4.6 billion.

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