China on guard as European Central Bank, US Fed interest rate hikes threaten greater spillover effects

Name: US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994
Uploaded: 2022-07-22T12:00:21.000Z
Duration: 2 min 9 s
Description: US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994

China is now the only major economy maintaining a loose monetary stance, as soaring inflation forces European institute to push up benchmark rate for first time in 11 years

Beijing is looking to prevent and mitigate ‘external shocks’ from rising capital outflows as investors shy away from yuan

Reading Time:3 minutes

Why you can trust SCMP

After the European Central Bank’s interest rate hike on Thursday, China has become the only major economy maintaining a loose monetary stance. Photo: AP

Frank Tang

Published: 8:00pm, 22 Jul 2022

Beijing will “pay close attention” to external monetary policy tightening and conduct a timely assessment of its spillover effects after the European Central Bank joined the US Federal Reserve-led chorus of worldwide interest rate increases.

Following the first increase in 11 years by the European institute, which on Thursday pushed its benchmark rate up by 50 basis points, China has become the only major economy that is maintaining a loose monetary stance. This means it could face further tests in terms of capital outflow, foreign-exchange volatility and market expectations.

The world’s second-largest economy, which is preoccupied with economic recovery after its gross domestic product growth slumped to 0.4 per cent in the second quarter, could come under even greater pressure from steeper rate increases overseas.

Like it did last month, the US Federal Reserve is likely to raise its benchmark rate by another 75 basis points next week – and more later this year – in a bid to tackle 40-year-high inflation.

02:09

US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994

“The Fed is also faced with a dilemma between controlling inflation and stabilising the economy. We need to keep an eye on its monetary policy adjustment in the future,” said Wang Chunying, deputy director of the State Administration of Foreign Exchange (SAFE), on Friday.