By Jamil Anderlini in Beijing
(FT) -- China's central bank raised benchmark interest rates on Saturday, the second increase in just over two months, as the government stepped up its battle against persistent inflation.
The People's Bank of China announced a 25 basis point rise in the one-year base lending and deposit rates, taking the lending rate to 5.81% and the deposit rate to 2.75%.
The Christmas Day rate hike came after the central bank raised rates on October 19 for the first time in nearly three years. Although Christmas is not a public holiday in China, the timing of the rate hike announcement -- late on Christmas Day and on a Saturday -- was an apparent attempt not to unsettle global and domestic markets.
Annual consumer price inflation hit a 28-month high of 5.1% in November, up from 4.4% in October, and with real interest rates deep in negative territory, most economists expect China to continue the tightening cycle in the coming months.
"This rate hike demonstrates the Chinese authorities' determination to keep inflation under control up front, or front-loaded tightening," said Wang Qing, China economist at Morgan Stanley.
"The stronger than originally expected outlook for the US economy after the extension of [the] Bush tax cuts should also help remove some concerns about the potential weakness in external demand and make Chinese authorities more likely to tighten earlier and more aggressively, in our view."
The PBoC has also increased the proportion of deposits that banks must hold in reserve with the central bank six times this year in a move aimed at reining in excess liquidity and tackling stubbornly high inflation.
Chinese officials have expressed their preference for such administrative measures because of fears that comparatively high rates could attract flows of "hot money" into the country, especially at a time of extraordinarily loose monetary conditions in still-struggling developed markets.
"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. So today's move suggests Beijing is also coming around to this view," said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong. "We expect another 75 basis points of rate hikes in 2011."
The main driver of inflation in recent months has been the price of food, which rose 11.7% from a year earlier in November, but the government has claimed some victory in recent weeks in bringing down the soaring cost of vegetables. Officials appear confident in their ability to keep prices under control.
"The recent inflation is completely different from the periods of very high inflation China has encountered in the past," Liu Mingkang, chairman of the China Banking Regulatory Commission, said last week in Beijing. "There is overcapacity for most industrial goods in the Chinese market and it's impossible for upstream inflation to be transmitted downstream."
In early December Beijing said it was switching from its previous "moderately loose" monetary stance to a "prudent" monetary policy to focus efforts on avoiding economic overheating.
The benchmark Chinese stock market index has dropped more than 10 per cent since the middle of November on fears the government would introduce further tightening measures, including raising interest rates.
Source: CNN
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