Benchmark interest rate increase not to affect steel market

SteelOrbis Shanghai The People's Bank of China raised the benchmark deposit and loan interest rate as of August 19, 2006. The one-year benchmark deposit rate increased 0.27 percentage points from 2.25 percent to 2.52 percent, and the one-year loan rate increased from 5.85 percent to 6.12 percent. This interest rate hike can be regarded as one of the macro-control measures after the working meeting of State Council on June 14. Just as the spokesman said, by raising benchmark interest rate, we can increase the financing costs of investment in order to make enterprises and financial institutes think about the credit risk. In particular, with the increasing multi-channel financing, through raising the capital cost, we can widely adjust the behavior and expectation of investment, promoting the rationalization of various investment bodies. It must be pointed out that, according to the recent macro-control measures, the government's attitude of reining in the excessive growth in fixed assets investment is firm. Meanwhile, we can also find that the government is trying to protect the fast and stable development of macro-economy. There are not too many administrative measures or restrictions aiming to halt all the investment projects like before. On the steel market side, the current market moves stable, with overall “bearish commercial activity, low inventory, and no big price changes”. Nevertheless, the chance of a decrease in prices is very slim. For example, since many new supplies of wire rod, flat rolled, heavy and medium section steel have arrived in the previous week, the prices of the above products saw a slight decline during the first half of the week, but the prices became stable in the rest of the week. And in Friday afternoon, even a small rebound was observed in Shanghai hot rolled coil market. Due to the rapid growth in fixed assets investment, excessive liquidity, and low interest rate in China; the Central Bank will take measures to hike deposit reserve rate, raise deposit and loan rate, and accelerate RMB appreciation. These measures may rein the growth in steel prices for the next half of the year, but not have much influence on the current Chinese steel market. Therefore, the prices are unlikely to go down sharply.