8.2.11

FT.com / China in fresh interest rate rise

China in fresh interest rate rise

By Patti Waldmeir in Shanghai and Robert Cookson in Hong Kong

Published: February 8 2011 11:58 | Last updated: February 8 2011 11:58

China has raised benchmark interest rates for the third time since October, as Beijing intensifies its battle against stubbornly high inflation.

The benchmark one-year lending rate would rise to 6.06 per cent from 5.81 per cent, effective from Wednesday, the People’s Bank of China said on its website on Tuesday. The one-year deposit rate will rise to 3 per cent from 2.75 per cent but longer term deposit rates will rise by as much as 45 basis points.

“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams of Capital Economics.

The timing of the increase, which came on the final day of the week-long Chinese new year holiday, appeared to be aimed at avoiding unsettling global and domestic markets. The previous increase came on Christmas day.

“Clearly, Chinese policymakers are increasingly focused on fighting inflation and asset price bubbles,” said Dariusz Kowalczyk, economist at Crédit Agricole. The fact that deposit rates were raised by more than lending rates “shows the determination to bring the real savings rate closer to positive territory”, he said.

The rate rise comes as China seeks to curb rising inflation, particularly in food prices, following a huge expansion in the money supply in the wake of the financial crisis. Goldman Sachs forecasts that year-on-year consumer price inflation in China is likely to have risen to 5.3 per cent in January from 4.6 per cent in December.

In addition to interest rate rises, Beijing has sought to tighten liquidity in the economy by raising the amount of deposits that China’s biggest lenders must hold on reserve with the central bank.

“For China, the year of rabbit is the year of inflation,” said Qu Hongbin, greater China chief economist at HSBC. “Given that growth is still strong, Beijing can now fight against inflation single-mindedly”. Most economists expect a further interest rate rise and a further increase in bank reserve ratios in coming months.

Last month, the PBoC increased the reserve requirement ratio for China’s biggest banks by 0.5 percentage points to 19.5 per cent, its highest level since reserve requirements were introduced in the mid-1980s and the eighth such move since the start of 2010.

Jing Ulrich, head of China equities for JPMorgan, said she expected inflation to remain high in spite of the move. “We expect that inflation will remain elevated in the next several months due to a number of factors, including rising food prices, as well as inflation passed through from increasing wages, commodities prices, and possibly energy costs if they are liberalised.”

via ft.com

Chinese central bankers take action to cool inflation by raising interest rates again (eighth consecutive such move) to 3% from 2.75% for the one-year benchmark lending rate.

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