China Surprises with Hike

China has surprised the market with a 25 bp hike in the key 1-year deposit and lending rates. With the hike the deposit rate now stands at 2.5%. This is still below the inflation rate, which in Aug was 3.5%. This leave monetary policy very stimulative, even if not as much as previously. The lending rate now stands at 5.56%.

China has hiked reserve requirements recently, but it was announced as a temporary move. The other element of surprise comes from the interpretation of recent official comments suggesting no rate hike this year.

The dollar extended its earlier gains on the announcement. The Australian dollar was the hardest hit initially, but the Chinese move could also see profit-taking on EM and commodities.