China's inflation hits 34-month high

City A.M. Reporter
China's central bank has raised bank reserve ratios for the ninth time since last October after inflation rose to 5.5 per cent in May, its highest level in almost three years.

The central bank increased the ratio for China's biggest banks to 21.5 per cent, a record high, locking up funds that could otherwise be loaned out and add to inflationary pressures.

Chinese leaders have made bringing inflation under control their top priority this year, fearful that rising prices could not only unsettle the world's second-biggest economy but spark social unrest of the sort seen this week in southern China.

Data released on Tuesday showed economic growth is slowing down, but not too quickly, providing relief for financial markets that China will avoid a hard landing and leaving room for Beijing to focus on fighting inflation.

Non-food consumer prices climbed 2.9 per cent from a year earlier, the fastest pace since records began in 2002 , showing inflationary pressures are spreading more broadly in the economy and, for some, pointing to a rate rise this month.

The increase in reserves was the ninth since last October. The latest increase takes effect on June 20, the central bank said on its website.

The central bank has also raised interest rates four times since October to quell inflation. After consumer prices data earlier in the day, analysts had predicted further rate rises this month.

"Inflation is quite persistent, while growth is still resilient, so basically we don't see any reason to pause tightening based on today's data," said Wei Yao, an economist at Societe Generale in Hong Kong.

"We think that a June interest rate hike is still on the cards. They could hike anytime."

The central bank's one-year lending rate is 6.31 per cent and one-year deposit rate is 3.25 per cent.

At 5.5 per cent, China's consumer inflation in May was the highest in 34 months. It compared with expectations for 5.4 per cent and showed a pick up from 5.3 per cent in April.

"Inflation pressures remain large," Sheng Laiyun, a spokesman for China's National Bureau of Statistics told a news conference. However, he said the economy was on track for "stable and relatively fast growth".