China Raises Key Interest Rates to Counter Inflation
By Bloomberg News

China Raises Key Interest Rates to Counter Inflation - Bloomberg

China raised key interest rates for the third time since mid-October after growth accelerated and inflation stayed above 4 percent for a third month. The benchmark one-year lending rate will increase to 6.06 percent from 5.81 percent, effective tomorrow, the People’s Bank of China said on its website today.

China raised interest rates for the third time since mid-October ahead of a report forecast to show inflation accelerated to the fastest pace in 30 months.

The benchmark one-year lending rate will increase to 6.06 percent from 5.81 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will rise to 3 percent from 2.75 percent.

Oil and copper fell and emerging-market stocks extended losses on concern Premier Wen Jiabao’s campaign to contain consumer prices will slow the fastest-growing major economy. China joined India, Indonesia, Thailand and South Korea in boosting rates this year as Asian policy makers seek to avert economic overheating in the region leading the global rebound.

“Global markets may begin to see the frequent rate hikes as a sign that a growth slowdown in China is inevitable,” said Dariusz Kowalczyk, a Hong-Kong based economist at Credit Agricole CIB. “But in the end, the move will be seen as a sign of strength, with solid growth momentum allowing policy makers to raise rates.”

Oil for March delivery on the New York Mercantile Exchange fell as much as 75 cents, or 0.9 percent, to $86.73 a barrel and was at $86.88 at 10:36 a.m. London time. Copper slid on the London Metal Exchange.

Yuan Climbs

In offshore trading in Hong Kong, the yuan climbed 0.1 percent to 6.5555 per dollar. Non-deliverable forwards strengthened 0.2 percent to 6.4275, signaling a gain of 2.6 percent in the next 12 months from the Shanghai close of 6.5938.

The central bank moved on the last day of a week-long holiday and before a report next week that may show consumer prices rose 5.3 percent in January, according to the median estimate in a Bloomberg News survey of economists.

A drought that’s threatening grain production and a New Year surge in lending are adding to inflation risks after money supply jumped more than 50 percent in two years. Besides increases in rates and banks’ reserve requirements, Wen’s campaign spans sales of state-food reserves, subsidies for low- income earners, and crackdowns on speculation and hoarding.

The central bank raised rates for longer-term deposits by more than the 25 basis point increase for one-year savings. At the same time, the rates for loans of longer than one year were lifted by less than a quarter point.

Encourage Savers

“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams, a London-based economist at Capital Economics Ltd.

China’s 0.75 percentage point of rate increases since the global financial crisis compare with India raising borrowing costs seven times for a total of 1.75 percentage points. In South Korea, where policy makers will meet this week to decide on rates, borrowing costs have been raised by 0.75 percentage point so far.

China is among Asian countries that risk being caught in a “policy trap” by not raising interest rates fast enough to curb inflationary pressures, Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd., said in a note yesterday.

“So far, the Chinese leadership has adopted a measured approach to inflation,” Roach said. “The mix of Chinese policy tightening, however, needs to shift much more decisively toward higher interest rates. With the Chinese economy still growing at close to 10 percent per year, the government can afford to take more short-term policy risk.”

Raising Prices

Companies from Baoshan Iron & Steel Co. to Starbucks Corp. and McDonald’s Corp. have raised prices. Chinese consumers are more concerned about inflation than at any time in the past decade, according to a central bank survey released in December.

China’s foreign-exchange reserves, the world’s biggest, climbed by a record $199 billion in the fourth quarter to $2.85 trillion, and banks extended 7.95 trillion yuan of new loans last year, exceeding the government’s targeted maximum of 7.5 trillion yuan.

--Li Yanping, Kevin Hamlin, Marco Lui, Shamim Adam. Editors: Paul Panckhurst, Chris Anstey

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