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China hikes interest rates to fight inflation
By Zhang Fengming |
July 6, 2011, Wednesday
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Online Edition
Online Edition
CHINA will raise interest rates starting tomorrow, the third time this year and the fifth increase since October, as it acts to dampen high inflation.
The benchmark one-year lending rate will rise to 6.56 percent, up 0.25 percentage point, the People's Bank of China said on its website today. The one-year deposit rate will increase by the same level to 3.50 percent.
China has raised the benchmark rates five times, 25 basis points each time, since mid-October. The public housing fund lending rates will also rise from tomorrow.
The move is widely expected by economists on China's persistent inflation pressure, despite slowdown of producer manager index and monetary growth. The series of rates rises reflects China's firm hand to siphon liquidity by raising lending cost to avoid a credit-driven inflation.
China's consumer price index, a main gauge of inflation, rose 5.5 percent in May as a 34-month high.
The rate increases are deemed preemptive ahead of the announcement of July inflation later this month.
Economists are widely expecting June inflation to rise beyond 6 percent, boosted by higher prices of pork and other foods.
China's manufacturing activities are indicating a slowdown of economic growth or a soft landing of the economy.
The official Purchasing Managers' Index, a comprehensive gauge of manufacturing sector operating conditions, settled at 50.9 percent in June, the weakest level in two and a half years.
It was closer to the benchmark reading of 50 which seperates expansion from contraction, and compared with 52 percent in May. The June data was lowest since February 2009.
"As inflationary pressures are declining on lower commodity prices, the required tightening in the second half will be far less than in the first half," said Liu Ligang, an Australia and New Zealand Banking Group analyst. "However, the worsening negative real interest rate will warrant interest rate hikes. We think a hike prior to the June data releases is possible and another in the third quarter is also likely."
The real interest rate still remained negative against a May inflation of 5.5 percent, an incentive for households to switch savings to asset markets.
Deutsche Bank's chief economist in China Ma Jun said he expects China's inflation to grow 5 percent this year, before dropping to 3.5 percent in 2012.
Ma said the inflation could reach to a peak in the middle of this year, with tightening monetary policies also at its peak.
He said the tightening could ease in the third quarter of this year on the easing of inflation.
China has raised the reserve requirement rate six times this year to mop up liquidity. Big banks face a requirement of 21.5 percent and economists said that could rise to 23 percent by the end of the year.
The benchmark one-year lending rate will rise to 6.56 percent, up 0.25 percentage point, the People's Bank of China said on its website today. The one-year deposit rate will increase by the same level to 3.50 percent.
China has raised the benchmark rates five times, 25 basis points each time, since mid-October. The public housing fund lending rates will also rise from tomorrow.
The move is widely expected by economists on China's persistent inflation pressure, despite slowdown of producer manager index and monetary growth. The series of rates rises reflects China's firm hand to siphon liquidity by raising lending cost to avoid a credit-driven inflation.
China's consumer price index, a main gauge of inflation, rose 5.5 percent in May as a 34-month high.
The rate increases are deemed preemptive ahead of the announcement of July inflation later this month.
Economists are widely expecting June inflation to rise beyond 6 percent, boosted by higher prices of pork and other foods.
China's manufacturing activities are indicating a slowdown of economic growth or a soft landing of the economy.
The official Purchasing Managers' Index, a comprehensive gauge of manufacturing sector operating conditions, settled at 50.9 percent in June, the weakest level in two and a half years.
It was closer to the benchmark reading of 50 which seperates expansion from contraction, and compared with 52 percent in May. The June data was lowest since February 2009.
"As inflationary pressures are declining on lower commodity prices, the required tightening in the second half will be far less than in the first half," said Liu Ligang, an Australia and New Zealand Banking Group analyst. "However, the worsening negative real interest rate will warrant interest rate hikes. We think a hike prior to the June data releases is possible and another in the third quarter is also likely."
The real interest rate still remained negative against a May inflation of 5.5 percent, an incentive for households to switch savings to asset markets.
Deutsche Bank's chief economist in China Ma Jun said he expects China's inflation to grow 5 percent this year, before dropping to 3.5 percent in 2012.
Ma said the inflation could reach to a peak in the middle of this year, with tightening monetary policies also at its peak.
He said the tightening could ease in the third quarter of this year on the easing of inflation.
China has raised the reserve requirement rate six times this year to mop up liquidity. Big banks face a requirement of 21.5 percent and economists said that could rise to 23 percent by the end of the year.
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