China Announces 2nd Increase in Benchmark Interest Rates This Year to Tackle Inflation

Photo taken on March 24, 2011 shows the office building of the People's Bank of China (PBOC) in Beijing, capital of China. The PBOC, China's central bank, announced on Tuesday that it would raise the benchmark one-year borrowing and lending interest rates by 0.25 percentage points as from Wednesday. (Xinhua/Wang Zhen) (ljh)

BEIJING, April 5 (Xinhua) -- The People's Bank of China, the central bank, announced Tuesday it would raise the benchmark one-year borrowing and lending interest rates by 25 basis points beginning Wednesday.

This was the second time the central bank raised the benchmark interest rates this year and the fourth increase since the start of 2010.

After the increases, the one-year deposit interest rate will climb to 3.25 percent while the one-year loan interest rate will reach 6.31 percent.

Analysts said the move indicated China's ongoing effort to ease stubborn consumer price rises, but the timing was surprising, which might mean the consumer price increase in March would top the government's forecast.

The consumer price index (CPI), a major gauge of China's inflation, jumped 4.9 percent in February from one year earlier, exceeding the government's full-year target of 4 percent.

The price pressure was still mounting. Food prices, which account for about one-third in the basket of goods used to calculate China's CPI, surged 11 percent year on year in February.

"It's widely expected that the reading of March's CPI will hit a new high. The interest rate rise is the central bank's advance response to rising inflation pressures," said Liu Yuhui, an economist with the Chinese Academy of Social Sciences, a government think tank.

Rising oil and commodity prices on the global markets will also push prices higher in China during the year, said Lu Zhengwei, chief economist of the Industrial Bank.

Lu expected China's CPI growth to reach a new high of 5.2 percent in March, the fastest pace since July of 2008. He added that there would be another two or three benchmark interest rate hikes during the remainder of the year.

"The timing of the increase, during a holiday and before the announcement of economic data, will help minimize the impacts on the markets," said Han Fuling, a researcher at the Beijing-based Central University of Finance and Economics. China's Shanghai and Shenzhen bourses were closed between April 3 and 5 for the traditional Tomb Sweeping Festival.

The National Bureau of Statistics is scheduled to release the March economic data on April 15, including the CPI, industrial production and fixed asset investments.

China has prioritized price stability in this year's government work report and stepped up efforts to bring inflation under control.

As prices rising rapidly defy the government's policies, Chinese Premier Wen Jiabao has compared inflation to a tiger, "once it gets free, it's difficult to put it back into the cage," he told reporters last month.

To mop up the excessive liquidity that helps fuel inflation, China's central bank has raised the reserve requirement ratio for commercial banks nine times since the beginning of last year.

The value of new loans issued by Chinese banks in February fell to 535.6 billion yuan (81.77 billion U.S. dollars) from January's 1.04 trillion yuan.

Besides the monetary tools, the government also implemented production increases, lower transportation fees for some farm produce and an intensified crackdown on price speculation and hoarders.

Analysts said China's incessant interest rate hikes and the government's policies to cool home price growth would work together to discourage property speculation.

"There is no sign of let-up in the government's property regulation campaign, leaving real estate developers no other choice but turning to discount promotions," said Changjiang Securities analyst Su Xuejing.

Su said the tightening measures would not only discourage property speculators, but also home-buyers who want to improve their living standards, leading to a sharp fall in property turnovers in some large cities.

Source:xinhua