LONDON, Oct 19 (Reuters) - The People's Bank of China said on Tuesday it was raising its benchmark one-year interest rates by 25 basis points with effect from Wednesday.
Following are reactions from analysts and traders to the news.
WEI YAO, CHINA ECONOMIST AT SOCIETE GENERALE IN HONG KONG
"This is definitely a major surprise.
"China's central government is definitely more hawkish than we think.
"The reasons are strong lending, sticky inflation and the robust activity growth. Probably the September activity data is stronger than the market expects, which gives the PBOC the extra comfort in hiking.
"In the short term there are definitely several sectors that will feel some pain, such as property and local government financing platforms."
OLIVER PURSCHE, PRESIDENT, GARY GOLDBERG FINANCIAL SERVICES, SUFFERN, NEW YORK:
"As much as this is a surprise, it is an expected surprise. There's nothing shocking about it; China has done a good job of telegraphing its moves. I think this is part of the overall politics China is playing. They have an economy that's moving faster than they'd like it to.
"I don't expect this to influence us much. The impact it'll have should be minimal. The reason futures are down now is because we've had a great run for the last 45 days, and then both IBM and Apple disappointed yesterday after the close, which is further evidence that, as optimistic as we are, things aren't necessarily rosy. Continued caution is warranted, and we're starting to increase our defensive position."
KIM JAE-EUN, ECONOMIST, HYUNDAI SECURITIES IN SEOUL
"The rate hike may be a political goodwill gesture to the U.S., especially after the Treasury Department postponed its report on the currency practices."
"Still, the rate hike is expected to ease outside pressure on the yuan's revaluations as it will attract more funds and naturally lift the yuan."
"The move indicated China would not artificially revaluate the yuan due to outside pressure."
COMMERZBANK COMMODITIES ANALYST CARSTEN FRITSCH
"So far the tightening has not yet had any meaningful impact on Chinese growth rates and oil demand. Crude oil imports have come to record levels last month. But the move may raise concerns at some point that the tightening could affect growth rates."
MANIK NARAIN, UBS EMERGING CURRENCY STRATEGIST
"We're seeing a pullback in high-beta, risky assets as this move is seen as a strong policy tightening that will slow down the Chinese economy.
"This is essentially an exit strategy and means that policy has become less accomodative.
"It could also be intepreted as China's reluctance to use a stronger yuan as a tool to tighten liquidity. We haven't seen an acceleration in yuan appreciation at all.
"It's a little hard to come to any strong conclusions but this may not be positive for the markets if it represents a possible rise in trade frictions between the U.S. and China. This is arguably not the most healthy dynamic we're seeing."
ARNE LOHMAN RASMUSSEN, CHIEF ANALYST AT DANSKE BANK
"(The rate hike) will have a negative impact on base metals because all things being equal, it will dampen growth in China and it could also strengthen the dollar slightly. But we shouldn't put too much weight on it because why are rates hiked in the first place, they're hiked because growth is quite strong in China."
ROB SUBBARAMAN, CHIEF NON-JAPAN ASIA ECONOMIST AT NOMURA IN HONG KONG:
"We were forecasting a rate rise but were getting worried that we were outliers.
"From our perspective, the economy looks to have stabilised and is picking up again. Look at the PMI, bank lending and the record rise in FX reserves. And fundamentally policy rates are just too low for an economy that's growing around 10 percent.
"To avoid bigger distortions, China needs to start moving rates to more appropriate levels.
"China's economy looks as though it's decoupling from other major economies, and its policies should as well."
ANANTH NARAYAN G, STANDARD CHARTERED BANK, MUMBAI
"Unlikely we'll see many more hikes, so actual impact might be limited...plus they might also continue to use currency to tighten (monetary policy)."
DARIUSZ KOWALCZYK, SENIOR ECONOMIST AND STRATEGIST AT CREDIT AGRICOLE CIB IN HONG KONG:
"The market was unprepared for the hikes so yuan swap rates will rise at the short end and the curve will flatten. There will be more portfolio inflows and yuan will likely gain in the NDF market, but on the other hand there is less need for China to appreciate yuan in the spot market given that inflation is now tackled through rates."
"They did it now likely because Thursday's GDP/CPI data is too strong for them. Also it's after the Communist Party meeting ended and a new 5-yr plan was adopted."
ZHU JIANFANG, CHIEF ECONOMIST AT CITIC SECURITIES IN BEIJING:
"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way."
"Besides, the negative real rates will also place increasing pressure on asset prices, as depositors tend to channel their money from bank accounts to the property market."
HITENDRA DAVE, HEAD OF GLOBAL MARKETS, HSBC INDIA, MUMBAI:
"China hasn't raised so far and (they) have only been raising the reserve requirements. With all the asset price speculation, they had to raise rates to normalise policy. It is the local factors that led them to take this decision."
KORNELIUS PURPS, FIXED INCOME STRATEGIST WITH UNICREDIT IN MUNICH
"The authorities are eager to moderate the housing sector without dampening the overall economy's growth. This should not be interpreted as an impediment to global growth."
CHRIS TURNER, HEAD OF FX STRATEGY AT ING
"This is part of the moderate tightening cycle that we are seeing from Chinese authorities to balance their economy. It is part of the normalisation of interest rates in an economy which is growing at a modestly fast clip. The market is reacting like there is an increased risk of hard landing with the commodity currencies like the Aussie being sold off, but I don't think that is the case."
BEN SIMPFENDORFER, CHIEF CHINA ECONOMIST AT RBS
"A surprise, but welcome, hike. It suggests strong inflation and GDP figures on Thursday, but also some concern about property."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"One thing is sure, that if they have raised interest rates now, then it creates ground for the yuan to appreciate. So it will be difficult for them to keep away the appreciation pressure on their currency".
KIT JUCKES, CURRENCY STRATEGIST, SOCIETE GENERALE, LONDON
"This means China is concerned that bank lending and domestic asset price inflation are too strong and they will have to accept a stronger currency.
"The gut reaction of the market is to sell commodity block and emerging market currencies. But it's not a game changer and there will probably be a queue of people looking to buy EM currencies on dips."
PARK TAE-GEUN, BOND ANALYST, HANWHA SECURITIES IN SEOUL
"The decision caught markets off guard. Raising lending rates is more than a liquidity control and can be taken as a tightening signal."
SIMON DERRICK, HEAD OF FX RESEARCH AT BANK OF NEW YORK MELLON
"The PBOC move follows a clear need by the Chinese authorities to take out some of the heat from the economy. Whether this move will lead to a broader move on its currency is open to debate. It certainly leads to speculation that the U.S. and China are in some sort of a deal which will perhaps see the U.S. taking a more gradualist approach to QE. The dollar has already moved higher after this news."
(London Treasury Desk, +44 207 542 4441)