China Raises Interest Rates in an Attempt to Control Inflation

It has been nearly two years, since the word inflation sent shock waves to commodities markets. As investors worried that a pattern of runaway inflation would ensue. Since that time, as the global economic recession took place, inflation has become less of an issue. This is because of the sharp fall off in commodities prices. However, over the past few months as the world economy is attempting to stabilize; inflation has begun to reappear in China. Where, recent reports from the government are showing that inflation doubled from the December to January time frame coming in at: 4.3%. At the same time, housing prices have increased by 9.6%. This is the fastest rate of increase in prices, in nearly 19 months. As a result, the People's Bank of China has raised interest rates and is requiring the large commercial banks to place more of their reserves with the central bank.

What this shows; is that the threat of inflation is continuing to remain a concern. In the case of China, the economy is growing so fast, that the demand for various products is increasing. This is a preemptive move to prevent a similar situation that occurred in 2007, when the inflation rate was running in the 11% range. This means that the People's Bank must increase reserve requirements for commercial banks. This will slow the overall demand for loans; as businesses and consumers are forced to pay higher interest rates. Over the short term, such actions will cause some concerns. However, the long term effect is that: inflation can remain under control because the central bank acted early and decisively.