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China raises interest rates for sixth time this year

(China Daily)
Updated: 2007-12-20 19:05

The central bank yesterday raised its benchmark interest rates for the sixth time this year, in a bid to prevent the economy from overheating and curb rising prices.

The People's Bank of China increased the one-year benchmark deposit rate by 27 basis points to 4.14 percent while raising the one-year lending rate by 18 basis points to 7.47 percent, effective from December 21.

"This move is conducive to preventing the rapidly expanding economy from overheating and structural price rises from evolving into entrenched inflation," the central bank said in a statement on its website.

"The gap in the increases shows that authorities would like to rein in the lending enthusiasm of banks," said Guo Tianyong, economist with the Central University of Finance and Economics (CUFE).

Chinese banks are estimated to make a total of 3.6 trillion yuan ($490 billion) in new loans, about 420 billion yuan ($56.9 billion) more than last year.

Related readings:  PBOC rules out imminent interest rate hike  Morgan Stanley: China may raise interest rate despite US cut  Interest rate raised for 5th time this year  Interest rate raised to curb inflation

The Central Economic Work Conference early this month set the tone for a "tight" monetary policy to be adopted next year to cool off the fast-growing economy, which expanded by an impressive 11.5 percent year on year in the first three quarters.

"Raising the lending rate by a smaller margin is in line with what the central policymakers want," Guo told China Daily.

In a rare move, however, it lowered the rate for demand deposit by 9 basis points to 0.72 percent.

Analysts said the move will encourage people to keep cash in the bank rather than making it readily available for stock and property investments.

The central bank raised the interest rates of three-month deposits by 45 basis points and six-month deposits by 36 basis points, both larger than the benchmark one-year interest rate adjustment.

"It shows that pressure from shorter-term inflation is more acute, and the authorities expect it to ease in the longer term," Song Guoqing, senior economist with Peking University's China Center for Economic Research, told China Daily.

China's consumer price index, a key indicator measuring inflation, rose to an 11-year high of 6.9 percent in November.

"At the same time, the apparent recent acceleration of non-pig food inflation and higher producer prices might have unnerved the authorities," said Stephen Green, head of research of Standard Chartered Bank (China). "What is clear is that sentiment in Beijing is changing - and it is likely that the first quarter of next year will see more aggressive action to control inflation."