Wed, Feb 09, 2011 - Page 11 News List

China increases interest rates to control inflation

BATTLE STATIONS:An analyst said the hike highlighted that inflation had become Beijing’s top policy focus and he expected two more rate increases to follow this year


China’s central bank yesterday raised interest rates for the third time in four months, as authorities ramp up efforts to tame inflation amid fears it could trigger social unrest.

The People’s Bank of China said in a brief statement that it would raise the one-year deposit and lending rates by 25 basis points each, taking the rates to 3.0 percent and 6.06 percent respectively.

In October last year, policymakers raised rates for the first time in nearly three years as they tried to restrain a flood of liquidity which has been fanning inflation and hiking property prices. They raised them again on Christmas Day.

China’s consumer price index (CPI), a key measure of inflation, rose 4.6 percent year-on-year in December, down from 5.1 percent in November, which was the fastest rate in more than two years.

The full-year CPI was up 3.3 percent, exceeding Beijing’s official target of 3 percent. The government has raised its CPI target to 4 percent for this year, as it is forced to acknowledge its limits in constraining prices.

Brian Jackson, senior strategist at the Royal Bank of Canada, said the latest rate hike highlighted the fact that inflation had become the government’s key policy focus.

“Price pressures are building, they’re at uncomfortably high levels already and there’s a good chance that they could go further in the next few months,” he said. “There is a greater sense of policy urgency now in Beijing to deal with that.”

Ever fearful of inflation’s historical potential to spark social unrest, authorities have already pulled on a variety of levers to try and rein in consumer prices and tame the red-hot real estate sector.

These include the three interest rate hikes and a number of bank reserve requirement ratio increases.

However, last month, central bank Governor Zhou Xiaochuan (周小川) said that inflation was still higher than expected and that authorities had to remain vigilant, suggesting a rate hike could be on the horizon.

Also last month at the World Economic Forum in Davos, Switzerland, business leaders raised concern about China’s property prices, with some worrying that if the bubble burst it could hurt growth.

China’s property prices last year defied cooling measures, climbing for four straight months to December and frustrating first-home buyers who feel apartment prices are out of their reach.

To try to remedy this, the government has launched a property tax trial on two of China’s biggest cities and raised minimum down payments. It has also ordered banks not to provide loans for third home purchases.

Jackson said he expected another two interest rate hikes in the second and third quarters of this year, as the government continues to try and battle inflation.

“Inflation has still got a little bit more to go in the first half of the year, but we would expect it to start to ease in the second half of the year,” he said.

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