This morning it was announced that China raised its reserve requirement for the third time in a month. This monetary policy tool is designed to decrease the amount of money in circulation by restricting bank lending and ease inflationary pressure. Despite this action many analysts are concerned that inflationary pressure in China is too great and that they can expect to see price increases in the coming months. We should learn more tomorrow as China is scheduled to release their version of the consumer price index. And we may want to pay attention because inflation in China can put pressure on mortgage rates here at home. How?
If you are a regular reader of this blog then you know that inflation is the primary driver of interest rates. Simply put, if you lend someone some money today and you think the purchasing power of that money will be less in the future you will require a higher rate of interest to be paid for the right to borrow the money.
Chinese inflation can lead to inflation here in the US because we import so much from China. In fact, in 2009 the US imported almost $300 billion worth of goods and services. Therefore, if prices rise in China then the price of those goods that we purchase from them will rise as well. That is likely to impact the consumer price index here in the US and pressure mortgage rates higher.