China hikes interest rates in battle to curb inflation

 Published: 12/25/2010 3:45:01 AM GMT
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BEIJING (AFP) – China's central bank on Saturday raised interest rates for the second time in less than three months as authorities ramp up efforts to curb borrowing, rein in property prices and tame inflation.

The People's Bank of China said in a brief one-line statement that it will raise the one-year lending and deposit rates by 25 basis points each. The move takes the rates to 5.81 percent and 2.75 percent respectively from Sunday.

In mid-October, policymakers raised rates for the first time in nearly three years as they resort to stronger measures to try to slow a flood of liquidity which has been fanning inflation and driving up property prices.

Analysts said the latest interest rate hike would be followed by more next year as stability-obsessed leaders step up efforts to calm growing consumer anxiety about rising costs.

"The choice of Christmas Day is a little surprising but I think the market generally expected interest rates to rise," Ken Peng, a Beijing-based economist for Citigroup, told AFP.

"The central bank needed to do this to win credibility to fight inflation."

Ever fearful of inflation's potential to spark unrest, authorities have been pulling on a number of policy levers to rein in consumer prices and cool the red-hot real estate market.

Earlier this month, the central bank ordered lenders for the sixth time this year to keep more money in reserve, effectively limiting the amount of funds they can lend.

Despite these measures, bank lending has remained stubbornly high and property prices have continued to rise, frustrating first-home buyers who feel apartment prices are out of their reach.

Property prices in 70 major cities recorded their third straight month-on-month rise in November, defying Beijing's attempts to cool the red-hot market by hiking minimum downpayments and ordering banks not to provide loans for third home purchases.

Prices were up 0.3 percent last month from October and 7.7 percent higher than a year ago.

The value of new loans issued by China's banks fell in November from October but was still well above forecasts as Beijing struggled to stem the flood of liquidity.

Royal Bank of Canada analyst Brian Jackson said the rate hike showed policymakers realised measures such as raising bank reserve requirement ratios were not enough to stem the flood of credit.

"A rate hike is not normally on the wish-list for Santa Claus but in China's case this is a prudent move," said Jackson.

Adding to Beijing's headaches, the consumer price index, a key measure of inflation, topped five percent in November for the first time in more than two years as food costs soared nearly 12 percent year-on-year.

Further interest hikes had been expected after top leaders pledged earlier this month that China would move from a "relatively loose" monetary policy to a "prudent" one next year.

"We expect two to three rate hikes in the first half of 2011," said Wang Qing, a Hong Kong-based economist for Morgan Stanley.

The central bank said Friday it would use a variety of tools including interest rate hikes and tighter lending restrictions over the next 12 months to curb inflation and prevent an asset price bubble, according to comments by vice governor Hu Xiaolian posted on the bank's website.


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