LONDON, England

CHINA’S second interest rate increase in just over a month failed

to dent market optimism yesterday, with many of the world’s leading stock indexes holding at levels not seen since the summer of 2008, before the collapse of Lehman Brothers triggered the biggest bear market since World War II.

In a widely expected move, the People’s Bank of China announced yesterday on its website that the benchmark one-year deposit rate would rise by a quarter percentage point to three per cent and the one-year lending rate would increase by the same amount to 6.06 per cent.

yesterday’s rate increases came at the end of China’s Lunar New Year festivities — markets are due to open again today — and follow last Christmas Day’s surprise rise. The moves are designed to keep price increases in check and make sure economic growth is running at sustainable levels.

The worry in the markets is about by how much growth will slow — after all it’s been Chinese growth over the last few years that prevented a global recession from turning into a depression. That said, investors would much rather a gradual and orderly tightening of monetary policy than a swift reversal further down the line.

Stock markets took a small knock in the immediate aftermath of the news but the optimism that has been evident in markets so far this year supported markets in Europe and the US.

“A further rate hike by China’s central bank has

been largely anticipated, with global risk appetites showing resilience in the aftermath

of the move,” said Vassili Serebriakov, an analyst at Wells Fargo Bank.

In Europe, the FTSE 100 index of leading British shares was up less than two points at 6,053 while Germany’s DAX rose 0.3 per cent to 7,302. The CAC-40 in Paris was 0.2 per cent higher at 4,098.

In the US, the Dow Jones industrial average was up around three points at 12,164.73 soon after the open while the broader Standard & Poor’s 500 futures fell 0.1 per cent to 1,318.

China’s rate hike came amid mounting speculation that other central banks, including the European Central Bank and the Bank of England, will lift borrowing costs earlier than previously thought as inflation has spiked above target levels.

Though the ECB has had to contend with a debt crisis that has at different times threatened the existence of the euro currency itself, there are growing indications that rate-setters are getting nervous about consumer price inflation running at 2.4 per cent, above the bank’s mandate of keeping it “close to but below” two per cent.

Late Monday, Yves Mersch, Luxembourg’s top central banker and a member of the ECB’s rate-setting governing council, said interest rates may have to rise if the current energy-related spike in inflation is passed through to wage demands.

By mid-afternoon London time, the euro was 0.5 per cent higher on the day at US$1.3630.

Predictions of higher interest rates support the euro against the dollar at the moment because the US Federal Reserve is not expected to alter its super-loose monetary policy any time soon, partly because it has a dual mandate of looking at employment levels as well as inflation.

The euro’s main pillar of support so far this year has rested on growing optimism that the EU is finally getting a handle on the debt crisis that has already seen Greece and Ireland bailed out.

Some of that optimism was dented last week when a meeting of EU leaders in Brussels failed to deliver anything concrete.

Though a “comprehensive solution” was not expected to have been announced, the failure of leaders to provide a road map to a wide-ranging solution as soon as the next leaders’ summit in March disappointed many investors.

“This is currently looking less likely,” said Jane Foley, senior currency strategist at Rabobank International. “Demands from Germany on greater economic cooperation on tax, wage and pension policies suggest a very complicated agenda is now on the table.”

In Asia, China’s rate hike came after the markets had closed. Investors will be interested to see how Shanghai’s stock markets trade today when they reopen following the Lunar New

Year holidays.