IF ASKED before the start of 2017 to bet on which important central bank would be the first to raise interest rates this year, the safe choice would have been the Federal Reserve. Some gamblers, relishing the long odds, might have gone for the Bank of England or even taken a flutter on the European Central Bank. All these guesses would have been wrong. The first to budge this year? The People’s Bank of China.
On February 3rd the Chinese central bank raised a series of short-term rates. The decision received scant attention. The increases were, after all, small: one-tenth of a percentage point for the main rates. It also seemed quite technical, primarily affecting liquidity tools that lenders can tap if short of cash. And there was no fanfare: the central bank did not publish an explanation.
But China’s move is important for two reasons. First, it highlights the government’s dilemma in managing the economy. Growth is expected to slow from last year’s pace of 6.7%, and recent surveys suggest that momentum is already ebbing. Sentiment is fragile: investment by private companies last year increased at its slowest pace in more than a…Continue reading