China fights inflation with Christmas rate rise

BEIJING Sat Dec 25, 2010 9:18am EST

1 of 2. A shopper walks past a window displaying prices of dresses and handbags at a shopping mall in central Beijing October 21, 2010.

Credit: Reuters/David Gray

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BEIJING (Reuters) - China's central bank raised interest rates on Saturday for the second time in just over two months as it stepped up its battle to rein in stubbornly high inflation.

The People's Bank of China said it will raise the benchmark lending rate by 25 basis points to 5.81 percent and lift the benchmark deposit rate by 25 basis points to 2.75 percent.

The central bank said in a statement on its website (www.pbc.gov.cn) that the latest rate rise would take effect on Sunday.

The move came after Beijing said earlier in December it was switching to a "prudent" monetary policy, from its earlier "moderately loose" stance.

Analysts said the change of wording, along with a recent pledge by top leaders to make inflation fighting a top priority for 2011, could pave the way for more interest rate increases and lending controls.

"This rate hike demonstrates Chinese authorities' determination to keep inflation under control up front, or front-loaded tightening," said Qing Wang, chief China economist at Morgan Stanley in Hong Kong.

"Compared to rate hikes in the beginning of next year, a rate hike before year-end will have a more tightening impact, as the interest rates on the medium- and long-term loans and deposits are reset at the beginning of each year according to the base rates."

The central bank said on Friday it will deploy a range of policy tools to head off inflationary pressures and asset bubbles.

To tame price pressures, China raised interest rates on Oct 19 for the first time in nearly three years. The consensus of analysts polled by Reuters this month was for three rate rises of 25 basis points each by the end of next year.

Along with playing a key role in the fight against inflation, policy tightening also signals the government's confidence that the world's second-largest economy is on solid ground, even as the U.S. and European recoveries remain fragile.

CHRISTMAS SURPRISE

While almost all investors and analysts thought more policy tightening was coming, there was uncertainty about whether the central bank would raise rates before the end of the year.

The central bank opted to raise banks' reserve requirements on Nov 19 ahead of data which showed inflation hit a 28-month high of 5.1 percent.

"We expected a rate hike by the end of the year, though Christmas Day is something of a surprise -- a rate hike is not normally on the wish-list for Santa Claus, but in China's case this is a prudent move," said Brian Jackson, economist with Royal Bank of Canada in Hong Kong.

"We think it is increasingly clear that using quantitative measures, such as reserve ratios, to rein in liquidity and credit has not been enough, and that adjusting the price of credit -- that is, interest rates -- is needed to get price pressures under control."

Chinese stock markets have shed nearly 10 percent since mid-November on concerns the government would ratchet up its monetary policy tightening in face of rising inflation.

China has also officially increased banks' required reserve requirements six times this year and restricted lending by them.

In addition, Beijing has taken a slew of steps to cool the property sector, trying to ward off a potential asset bubble.

(Additional reporting by Niu Shuping, and Jason Subler in Shanghai, Writing by Kevin Yao; Editing by Koh Gui Qing, Benjamin Kang Lim and Mike Nesbit)

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Comments (16)
JoshuaJ wrote:
Fighting off the market expectation is important. Inflation itself isn’t that bad.

Dec 25, 2010 6:22am EST  --  Report as abuse
Jocomus wrote:
That’s what China used to do : try to upset global monetary order when you were sleeping.

Dec 25, 2010 6:33am EST  --  Report as abuse
marisa70394 wrote:
‘Twas the year before massive inflation, and all through the Middle Kingdom, not a dissident was stirring, not even Liu Xiaobo…. While the leaders of China are keeping fairly quiet about it, China is in deep financial trouble. It may not be all their fault, but the blame does sit with them for many of their problems. Exports are way down because many citizens around the world are not buying “Made in China” anymore, despite the fact that such products try to hide their true origins. In addition, China has overextended itself by making all kinds of deals with rogue nations that they can’t deliver on. Imports to raw materials to China are down because exports of finished products out of China are down. The government of China is printing money as fast as it can to placate the masses who want hire wages, but this is driving up inflation just as it did in Germany in the early 1900’s. Unfortunately, China’s wages are not keeping up with costs, and the housing bubble in China is verging closer and closer to implosion, and it’s not just the empty ghost cities that are the problem, it’s the 65 million plus empty apartments that are crumbling from just sitting around for lack of occupancy and care. Perhaps it is the best thing that could happen to punish such an arrogant one party ruled government. I think most people in the world would like to see China’s leaders all hung over a fireplace like roasting chestnuts. If the leaders of China really cared for its citizens, then the world would really like China.

Dec 25, 2010 7:38am EST  --  Report as abuse
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