Interest rate rise to dampen inflation

08:38, April 06, 2011      

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China's central bank raised interest rates for the fourth time since October, as the world's second largest economy has faced persistent inflationary pressure and the public has aired rising displeasure about price rises.

Premier Wen Jiabao's State Council, the cabinet, has made reining in inflation as his government's top priority for this year, as he warned during an online chat early March that elevated price hikes across-the-board would add to problems affecting social tranquility in China.

The People's Bank of China, the central bank, said in a statement issued Tuesday night that the quarter-percentage-point increase lifts the one-year deposit rate to 3.25 percent, and the rate for one-year bank lending to 6.31 percent.

The abrupt increase of interest rates, following a three-day national holidays called Qingmingjie, when Chinese families pay tributes to their deceased ancestors and their beloved ones, verified the authorities' rising concerns about stubborn prices.

China's consumer prices rose 4.9 percent in January and February, driven by world oil price rises, and a double-digit jump in sensitive food and housing costs over the same period last year. Analysts have predicted that inflation kept its ascending trend and most probably hit more than 5.0 percent in March.

"Our inflation forecast is 5.2 percent year-on-year for March,"said Wang Qing, an economist with Morgan Stanley in Hong Kong in a note to clients.

The National Statistics Bureau is expected to reveal the data for last month next week.

The interest rate rise adds to six increases in banks' reserve requirement ratio (RRR) since September, and underlines China's determination to clamp down on elevated inflation.

The series of RRR and interest rates hikes reflects concerns by Beijing about outsize liquidity and a possible overheating worry among the government economists and decision-makers. The hefty rises in prices of vegetables, grain, fruit and meat, and other daily necessities and utilities including water, electricity and gas, have raised eyebrows of many who have complained aloud.

The seemingly solid economic recovery in the United States, which just reported tens of thousands of new jobs created by a steadily reviving economy, and rising inflation levels in Europe, which reported its March inflation could ratchet up to 2.5 percent, also weighed on Beijing's decision to take another notch on tightening monetary policy, economists said.

Chinese banks lent over 1 trillion yuan in January. That was after their 2010 lending rose to 8 trillion yuan ($1.2 trillion), overshooting the government's initial target of 7.5 trillion yuan.

Analysts say that China's central bank will raise the RRR and interest rates more in the coming months to rein in excess supply of credit and control inflation.

Some economist have predicted the central bank will have to raise interest rates by at least 50 basic points by the end of 2011.

The government has set a 4 percent inflation target this year but private sector analysts say consumer prices could rise by up to 6 percent in the coming months if the tightening is lessened.

By Li Hong, People's Daily Online
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