Swaps show PBoC to raise rates to 3.5%

Trading in interest rate swaps indicates that China will raise interest rates by 1 percentage point in a year, Bloomberg reported. Two-year interest rate swaps have risen 0.5 percentage points to 2.98% since the central bank raised the one-year deposit rate by 0.25 percentage points to 2.5% on October 19, indicating the expectation that the deposit rate will rise to 3.5% in one year. Further rate hikes will be fueled by fears of inflation, particularly after the introduction of quantitative easing policies in the US which would encourage capital inflows into China. However, rate hikes could attract even more speculative capital as investors seek to profit from the interest rate spread between China and the US. On Monday, China’s one-year deposit rate was 1.74 percentage points higher than the US equivalent.