Inflation-Scared China Raises Interest Rates Slightly

By: EW News Desk Team   Date: 9 February 2011

About The Author

EW News Desk Team

Always on the look out for the latest news to monitor the state of the world economy.

EconomyWatch, News Desk Team

 

  • Dot Div
  •      
09 February 2011

China staged its third interest rate increase since October on Tuesday,

the latest sign of the authorities’ intensifying efforts to temper the blistering pace of economic growth

and prevent already worrisome inflation levels from escalating further.

The central bank in Beijing raised its benchmark one-year deposit rate by a quarter of a percentage point, to 3 percent, and its one-year lending rate by a similar amount, to 6.06 percent.

The timing of the announcement, at the very end of the Lunar New Year holiday, which has kept mainland Chinese markets shut for the past week, was in line with what many analysts had expected.

In fact, many economists forecast still more increases and other growth-dampening measures during 2011 as the battle to combat price rises intensifies.

“There are plenty of reasons to expect inflation to pick up further in the next few months,”

Brian Jackson, an analyst at the Royal Bank of Canada in Hong Kong, wrote in a note following the rate rise announcement Tuesday.

“Gradual policy rate increases in the months ahead should help to slow down investment in parts of the economy at risk of overheating,

while also reducing the risk that more aggressive and disruptive action may be required at a later stage,” he wrote.

Data released by the National Bureau of Statistics on Jan. 20 put the pace of growth at 10.3 percent for 2010 — up from 9.2 percent in 2009 — significantly above what analysts had expected.

Inflation came in at 4.6 percent for December — well above what the authorities are comfortable with — and could rise further, economists believe.

As in many other emerging economies, rapid growth has combined with easy credit and inflows of cash from overseas to push up asset and consumer prices this year.

Beijing has reacted with a range of tools aimed at containing price rises.

These have ranged from measures aimed specifically at the red-hot real estate sector —

like property taxes recently announced for some cities —

to instructions to the country’s state-controlled banks to lend less.

The reserve requirement ratio for state-controlled banks —

which effectively dictates the amount that lenders have to set aside against loans, and thus affects how much they can lend —

has been raised seven times since early 2010.

Currency appreciation will also most likely be part of Beijing’s efforts to curb inflation over 2011, said Mr. Jackson, the R.B.C. economist.

The pace of any such rises, however, is likely to remain muted, analysts and bankers with knowledge of policy makers’ views told the New York Times.

The renminbi has already been rising at an annualized rate of 5.7 percent against the dollar

since last June, when China broke the currency’s peg to the dollar --

an action that, somehow, seems to have escaped the attention of the US media and political elite.


  • Dot Div
  •      

Most Popular in China Economy

Related Links
blog comments powered by Disqus