Interest rates increase for 2nd time in 6 weeks
By Richard Fu |
February 9, 2011, Wednesday
|
Print Edition
Print Edition
CHINA yesterday raised interest rates for the third time since October, in a widely expected move as it seeks to curb inflation.
The benchmark one-year lending rate rose by 25 basis points to 6.06 percent and the one-year deposit rate increased by the same amount to 3 percent, effective today, the People's Bank of China announced on the last day of the week-long Spring Festival holiday.
Analysts had expected the central bank to raise interest rates around the holiday period, with more increases to follow during the rest of this year. The central government has made fighting inflation a policy priority in 2011.
"It's going to be a normal behavior for the central bank to hike rates in order to tame a new round of inflation," said Lu Zhengwei, senior economist at Industrial Bank Co, who last month forecast a February increase.
Lu expects another three to four rate hikes during the rest of the year, while economist Zhu Jianfang from CITIC Securities predicts two more in the first half of the year.
Rapid economic growth, easy credit and inflows of cash are pushing up asset and consumer prices in China. The Consumer Price Index rose 4.6 percent in December, easing from November's 5.1 percent. Consumer inflation may again pick up and may have hit 5.3 percent in January with food prices on the rise, according to the median estimate in a Bloomberg News survey of economists. January data is due next week.
Fast rising CPI is throwing the real deposit rate in China into negative territory, forcing the government to increase rates several more times for the rest of the year.
Rates for longer-term deposits were raised by more than the a quarter-point increase for one-year savings. Meanwhile, rates for loans of longer than one year were increased by less than a quarter-point, according to yesterday's central bank announcement.
This shows policy-makers want people to keep money in deposits rather than investing in equities or property.
The latest rate increase may deal a blow to the A-share market which reopens today after the holiday.
Yesterday's announcement dragged European shares lower. Asian markets were already closed. Investors worry that slower Chinese growth could affect the United States, Australia and other economies by cutting demand for their iron ore and machinery.
March crude oil contracts on the New York Mercantile Exchange slid as much as 1.3 percent to US$86.33 a barrel, the lowest in more than a week yesterday morning local time.
Interest rate increases cannot replace the hike in reserve requirement ratio, used by the central bank to drain cash from the economy and deter more speculative investment, Industrial Bank's Lu said. China has raised the reserve requirement ratio seven times since the start of 2010, with the latest coming last month.
The central bank may raise the requirement ratio twice again this quarter, according to Lu.
The benchmark one-year lending rate rose by 25 basis points to 6.06 percent and the one-year deposit rate increased by the same amount to 3 percent, effective today, the People's Bank of China announced on the last day of the week-long Spring Festival holiday.
Analysts had expected the central bank to raise interest rates around the holiday period, with more increases to follow during the rest of this year. The central government has made fighting inflation a policy priority in 2011.
"It's going to be a normal behavior for the central bank to hike rates in order to tame a new round of inflation," said Lu Zhengwei, senior economist at Industrial Bank Co, who last month forecast a February increase.
Lu expects another three to four rate hikes during the rest of the year, while economist Zhu Jianfang from CITIC Securities predicts two more in the first half of the year.
Rapid economic growth, easy credit and inflows of cash are pushing up asset and consumer prices in China. The Consumer Price Index rose 4.6 percent in December, easing from November's 5.1 percent. Consumer inflation may again pick up and may have hit 5.3 percent in January with food prices on the rise, according to the median estimate in a Bloomberg News survey of economists. January data is due next week.
Fast rising CPI is throwing the real deposit rate in China into negative territory, forcing the government to increase rates several more times for the rest of the year.
Rates for longer-term deposits were raised by more than the a quarter-point increase for one-year savings. Meanwhile, rates for loans of longer than one year were increased by less than a quarter-point, according to yesterday's central bank announcement.
This shows policy-makers want people to keep money in deposits rather than investing in equities or property.
The latest rate increase may deal a blow to the A-share market which reopens today after the holiday.
Yesterday's announcement dragged European shares lower. Asian markets were already closed. Investors worry that slower Chinese growth could affect the United States, Australia and other economies by cutting demand for their iron ore and machinery.
March crude oil contracts on the New York Mercantile Exchange slid as much as 1.3 percent to US$86.33 a barrel, the lowest in more than a week yesterday morning local time.
Interest rate increases cannot replace the hike in reserve requirement ratio, used by the central bank to drain cash from the economy and deter more speculative investment, Industrial Bank's Lu said. China has raised the reserve requirement ratio seven times since the start of 2010, with the latest coming last month.
The central bank may raise the requirement ratio twice again this quarter, according to Lu.
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