China raises interest rates

City A.M. Reporter
China raised interest rates for the second time in just over six weeks, intensifying a battle in the fast-expanding economy against stubbornly high inflation that threatens to unsettle global markets.

The timing was a surprise, coming on the final day of China's Lunar New Year holiday, but investors have long expected more monetary tightening as Beijing struggles to rein in price pressures and ward off a property bubble in an economy that grew at a double-digit pace last year.

Benchmark one-year deposit rates will be lifted by 25 basis points to three per cent, while one-year lending rates will also be raised by 25 basis points to 6.06 per cent, the People's Bank of China said. The changes go into effect on Wednesday.

Although annual inflation slowed in December, analysts polled by Reuters expect it to have picked up to 5.3 percent last month, the fastest pace in more than two years, on the back of soaring food prices.

"It is the first interest rate rise in the Year of the Rabbit, but it will not be the last," said Xu Biao, an economist with China Merchants Bank in Shenzhen, referring to the country's new year, which began last week.

"If inflation stays high in February, the central bank will be forced to increase interest rates on a continuous basis," he added. "Investor confidence will be seriously hurt by expectations of aggressive policy tightening."