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July 7, 2011

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Interest rates up again as China fights inflation

CHINA yesterday raised interest rates for the third time this year - and the fifth increase since October - as it tries to dampen high inflation.

The benchmark one-year lending rate rises to 6.56 percent from today, up 0.25 percentage points, the People's Bank of China said. The one-year deposit rate will increase by the same level to 3.50 percent.

China has raised the benchmark rates five times, by 25 basis points each time, since mid-October.

For savers, it means a 5,000-yuan one-year deposit can generate 12.50 yuan extra interest. Mortgage payers, on the other hand, will have to fork out 150 yuan extra each month for a 20-year 1 million yuan (US$154,641) mortgage.

Public housing fund lending rates will also rise from today. The five-year fund lending rate will rise by 0.25 percentage points to 4.45 percent while longer lending bears a rate of 4.9 percent, up from 4.7 percent.

The series of rates rises reflects the government's aim to siphon liquidity by raising lending costs to avoid credit-driven inflation.

Preemptive

"Inflation keeps swirling while economy keeps a stable though slower growth, driving the increase of interest rates," Lu Zhengwei, an Industrial Bank senior economist, said yesterday.

The rate increases are deemed preemptive ahead of the announcement of July Consumer Price Index, the main gauge of inflation, due on July 9.

Economists are widely expecting June inflation to rise beyond 6 percent, boosted by higher prices of pork and other food. China's May inflation rose to 5.5 percent, a 34-month high.

Economists said rate increases can help counter the depreciation of assets on spiraling inflation, though some said 0.25 percentage points increase was far from enough.

"Even if the central bank raises the rate by 250 basis points (10 times the current increase), the real savings rate is still negative against worsening inflation," Xu Xiaonian, a professor from China Europe International Business School, said on his microblog.

Asset markets

Lu said he expects China's inflation to hover around 6 percent in the quarter, with one to two more interest rate increases on their way.

Citigroup yesterday raised its forecast on China's inflation to 5.3 percent from a previous 5 percent.

Premier Wen Jiabao said earlier that keeping inflation under 4 percent, the country's official target, was difficult.

Citigroup said China could raise the rate one more time this quarter to consolidate the one-year benchmark savings rate to 3.75 percent.

The move is widely expected by economists on China's persistent inflation pressure, despite a slower producer manager index indicating slowdown of economic growth.

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.

A reading of 50 separates expansion from contraction.

The June data was lowest since February 2009.




 

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