The real real interest rate

14 Mar

In February inflation in China reached 2.7%, up from the 1.5% level recorded in January.  At first glance this is a scary jump, especially in the context of a 2.25% 1-year deposit rate – in other words it looks prima facie as if real-interest rates are negative.  Negative interest rates could stoke the real estate fire, and perhaps lead to the Government appreciating its currency in a bid to fend off the concurrent inflation.  However, let’s not be too hasty…

Firstly, China’s sequential inflation data is not seasonally adjusted, as we are accustomed in published data series from developed nations.  This year the week long Chinese new-year was in February, while last year it was in January (the result of incongruity between the Gregorian and Lunar calendars, with the new-year being based on the latter).  During the new-year food prices tend to rise, which would explain the jump to 2.7% from 1.5% – it was simply artificial.

More to follow…

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