The People's Bank of China (PBOC), the central bank, announced Tuesday it would raise benchmark one-year borrowing and lending rates by 25 basis points from Wednesday.
The rate hikes come amid increasing pressure on the Chinese government to control inflation.
After the hikes, the one-year deposit interest rate will climb to 3 percent while the one-year loan interest rate will reach 6.06 percent.
It is the first rise in China's one-year benchmark interest rates this year and signals a renewed effort to cool prices and tighten liquidity.
Analysts said the timing of the rise immediately after the Lunar New Year holiday would send a strong signal to the market that the PBOC was paying more attention to inflation.
"Though the December consumer price index (CPI) slid slightly from November, we are still facing great inflation pressure in the first half of this year," said Zhang Liqing, president of School of Finance with the Central University of Finance and Economics.
"This is the fundamental factor behind the central bank's interest rate hikes this time," said Zhang.
China's CPI, a main gauge of inflation, rose 4.6 percent in December year on year, slightly lower than November's 5.1 percent, a 28-month high.
For the whole of last year, the CPI was up 3.3 percent, exceeding the government's target of 3 percent.
The PBOC hiked the interest rates twice in 2010 to deal with rising inflation and soaring asset prices.
