Instant view: China raises rates by 1/4 point to 6.06 pct

BEIJING Tue Feb 8, 2011 6:32am EST

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BEIJING (Reuters) - China's central bank raised interest rates by a quarter-point to 6.06 percent on Tuesday, its second increase in just over a month, intensifying its fight against stubbornly high inflation.

Following are analysts' comments on the move:

LIAN PING, CHIEF ECONOMIST AT BANK OF COMMUNICATIONS IN SHANGHAI:

"The major reason behind this move is that consumer inflation in recent months is rising faster, and we expect the upward pressure to continue until the second quarter. Some time in the first half of this year, the CPI inflation may hit 6 percent, which will throw the real deposit rate into wider negative territory.

"So it is necessary for the central bank to raise interest rates at this point, and we expect at least two more interest rate rises for the rest of this year.

XU BIAO, AN ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN

"The January CPI must have hit a fresh high, which means (it is higher than November's) 5.1 percent, and the central bank had no other choice but to increase interest rates to tame inflation. It is the first interest rate increase in the year of the rabbit, but it will not be the last. If February CPI inflation stays high, the central bank will be forced to increase interest rates on a continued basis.

"It will deal a heavy blow to China's domestic stock markets. Investor confidence will be seriously hurt by expectations of aggressive policy tightening."

MARK WILLIAMS, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS

"The announcement may cause jitters about the impact tightening will have on Chinese growth but these should not be overplayed. The latest increases ... are in line with the gradual policy tightening that has been underway over the last few months and will not do much to slow growth.

"The constraint on credit growth is still the amount that banks can lend rather than the rates they charge. We expect one more rate hike this year, probably in Q2.

"Perhaps most interesting is that the benchmark rates for deposits of more than one year have been increased by more than 25 basis points ... while the increase in the benchmark rate for loans of longer duration was lower than for one-year loans. The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property. At the same time, the People's Bank is apparently concerned that continued lending rate increases could squeeze some longer-term borrowers."

CARSTEN FRITSCH, COMMODITIES ANALYST, COMMERZBANK, FRANKFURT

"Up to now such action by China has only brought a short-term reaction in commodity markets and prices rose again in a few days.

"I think a long-term impact on commodity prices is unlikely. I do not expect Chinese rates to rise to a level which would cause a collapse in economic growth. The rate rise seems to be an expression of economic strength in that growth should be brought to a sustained level and over-heating avoided.

PAU MORILLA-GINER, HEAD OF COMMODITIES AND SENIOR PORTFOLIO MANAGER AT LONDON AND CAPITAL

"I expect weakness short-term in oil and a short-term correction in base metals, which will be a big (buying) opportunity. The precious metals space will probably not be significantly impacted ... In the agriculture space, I expect it to be as volatile and as exciting as it has been, regardless of the cost of capital in China going up."

SIMON WEEKS, HEAD OF PRECIOUS METALS, BANK OF NOVA SCOTIA (on gold)

"To a large extent the move was expected. It has had some impact on the forex markets ... If you were to take a step back you would say China raising rates takes the heat out of their economy, so it is probably a bit bearish for commodities as a sector, but it is probably quite positive in terms of rebalancing the world's currencies.

"If the world were a better place generally, gold would be lower, so the kneejerk reaction is lower on that basis ... but we haven't really lost much ground."

OLE HANSEN, GENERAL MANAGER, SAXO BANK (on gold)

"This looks liked an initial kneejerk reaction as other commodities like oil and copper were hit by some selling. The dollar is a bit weaker, which could help stop the fall.

"It clearly shows the market is getting a bit immune to such announcements ... the belief that China will resume buying once they return from holiday tomorrow ... will keep (gold) supported."

MARK MILLER, GLOBAL MACROECONOMIST AT LLOYDS BANK CORPORATE MARKETS

"It's not that much of a surprise because of the inflation pressures China is confronting. Inflation fell back with the latest data to 4.6 percent but it was pretty clear that it will re-accelerate from here, and that's obviously at the forefront of the PBOC's mind.

"It potentially threatens the prospects for world growth going forward if the pace of tightening by China is too rapid."

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