China's decision to raise interest rates for the first time in 18 months is only the first in a series of measures aimed at preventing the booming economy from overheating, analysts said.
The People's Bank of China announced on Thursday that the one-year benchmark lending rate would rise by 27 basis points to 5.85 percent in an effort to put a brake on credit and control the "excessively fast" release of bank loans.
The news sent resource stocks, oil and commodity prices lower. Asian shares also reacted badly to China's move on fears it might restrict growth, falling from recent highs with exporters such as POSCO Co, the world's fifth-biggest steel maker, hurting more than others.
Copper, however, rebounded nearly 1 percent on bargain hunting, a day after China's rate decision spurred a broad sell-off in the commodities sector.
Analysts said the rate hike would have only a limited impact on controlling China's fixed asset investments, which expanded by 27.7 percent in the first quarter after rising by 25.7 percent for all of last year, and the broader problem of overheating.
They said the government was no doubt preparing other measures in the coming months to address the issues after the economy expanded by a faster-than-expected 10.2 percent in the first quarter of the year.
"There will be a set of macro-economic measures to adjust the economy," Ning Xiangdong (寧向東), an economist at the China Center for Economic Research at Tsinghua University, said.
He said these would include structural adjustments as well as using credit and interest rate tools.
"The problems with China's economy are all structural in nature so structural adjustments will be made in key sectors that are overheating like steel, metals, building materials and high-end real estate projects," he said.
Julian Jessop, chief economist for London-based Capital Economics, said the rate hike would on its own not have a major impact on cooling the economy but, as a part of expected broader economic reforms, was important.
"This step is not a big surprise. Some form of monetary tightening was widely expected after the strong first quarter data, which showed no sign that the investment boom is abating," Jessop said in a research note.
"We also think it will be the only change in this rate for a while but as part of a wider package of measures, it should help to deliver the `soft landing' that we expect over the next few years," she said.
Chen Xuebing, vice director at the Institute of Financial Studies at Fudan University, said another rate hike could not be ruled out.
"The move was mainly to tell people that more measures are coming but since the rate hike was so small, it won't have a big effect. If they don't have a good result from the rate hike, they will raise rates again," Chen said.
The rate hike was similarly expected to have little impact on the yuan, which is maintained in a tight band by the government and which the US and other Western nations want to see appreciate much more strongly.
"We do not think this will have any impact on the dollar/yuan exchange rate," said Stephen Green, analyst with Standard Chartered, adding the move "will not encourage more [fund] inflows."
The rate increase triggered a modest reaction in the currency market, with the dollar dropping as low as ?114.22 as traders speculated the move had implications for China's currency policy.
But as traders concluded that was unlikely, the dollar recovered to ?114.85.
"The market realized that the Chinese interest rate move doesn't immediately mean there are direct implications for the exchange rate regime," said Jeremy Stretch, currency strategist at Rabobank in London. "It's domestic economic fundamentals warranting a moderate tightening of monetary policy."
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