China launched an unexpected intervention to slow its red-hot economy yesterday, raising interest rates for the first time in 18 months and instructing banks to curb their lending.
The People's Bank of China (PBoC) lifted its benchmark one-year lending rate to 5.85 per cent from 5.58 per cent for the first time since October 2004. The move took world markets by surprise, hitting gold and metals prices, stock markets and the dollar.
The US government, which has piled pressure on Beijing to cool its economy, welcomed the decision and urged Beijing to follow it with further moves to allow its currency, the yuan, to rise against the dollar.
In a statement, the PBoC said: "The increase in the lending rate is aimed at further strengthening the fruits of macro controls and keeping solid momentum for the economy to grow in a continuous, rapid, co-ordinated and healthy manner." The move comes a week after official figures showed the economy grew 10.2 per cent in the first quarter on the back of a surge in investment.
Last week the International Monetary Fund, the global financial watchdog, warned that growth in China was unlikely to slow to a more sustainable pace without higher rates. "Without further tightening measures, the ample liquidity in the banking system could underpin a rebound in lending and investment," it said.
Analysts said the rate rise showed Beijing was determined to control investment and prevent the economy from overheating. Julian Jessop, at Capital Economics, said: "Changes in this interest rate are rare and tend to signal important changes in Beijing's policy priorities."
The central bank also issued guidelines to commercial banks designed to control lending to about a dozen industries where capacity swamps demand. It took no action on consumers, signalling it wants to rebalance the economy in favour of consumers and relieve the pressure on the yuan.
Commodities prices fell as traders bet that a slowdown in investment in the world's fastest-growing economy would curb demand for raw materials. Gold fell $14 an ounce to $628.20 after hitting a mid-session high of $642.10. Silver fell 4 per cent before rebounding after US regulators approved a new investment vehicle. The industrial metals platinum and palladium fell; copper slid 3 per cent, zinc 7 per cent and aluminium 4 per cent.
Mining stocks, which many analysts fear are trapped in a bubble, fell sharply. In the UK, BHP Billiton, Anglo American and Rio Tinto Group fell about 3 per cent each. BP dipped as oil prices dropped 1 per cent.
Paul Niven, at F&C Asset Management, said: "Commodities are bearing the brunt of the rise in rates today, on concerns of declining Chinese demand. The issue is wider than this, however, and with Japan withdrawing liquidity from the system and rates in major Western markets continuing to head higher, volatility in markets will begin to rise."
The dollar tumbled to a seven-month low against the euro as the Chinese move combined with a hint by Ben Bernanke, the chairman of the Federal Reserve, that the central bank would pause its programme of rate rises. Testifying to Congress, Mr Bernanke said: "At some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook."
The euro vaulted above $1.25 for the first time since May, leaping to $1.2533. "The message from Mr Bernanke is that the Fed is close to a pause," Nick Stamenkovic, at RIA Capital Markets, said.