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China Increases Interest Rates and the New Zealand Finance Minister Hints at a Return to Recession

The Peoples Bank of China lifted its benchmark one year lending rate to 6.06% and the one year deposit rate to 3% yesterday, in a bid to control inflation. Further increases are expected in the coming months. The continued strong growth in the Chinese economy means that the central bank is able to increase interest rates without it having a significant impact on the wider economy.

Though the Chinese Yuan is not yet a heavily traded currency, any monetary tightening normally has a major impact on commodity driven currencies like the South African Rand, Australian Dollar and New Zealand Dollar. China is a major importer of raw materials and as such commodity exporting economies are affected when the central bank takes money out of the economy. Given the present increased risk appetite in the market place however, immediate losses on these currencies were short lived. They soon rallied against the safe haven currencies, such as the US Dollar, Japanese Yen and Swiss Franc.

The New Zealand Dollar is expected to be under pressure over the coming weeks though after their Finance Minister, Bill English said it is was possible that their economy could head back into recession. English stated that the normal drivers of economic recovery appear to be absent, as consumers save more and pay off debts quicker than expected. If New Zealand does head back into recession and the Bank of England starts to increase interest rates, than we could expect notable change in this currency pair.

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