China Raises Rate Fourth Time Since October to Tame Prices

China Raises Interest Rates to Counter Inflation Pressure
The People's Bank of China stands in Bejing. Photographer: Nelson Ching/Bloomberg

China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy.

The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People’s Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent.

The move comes as a surprise to some, after Credit Suisse Group AG, Morgan Stanley and Bank of America-Merrill Lynch said officials may pause in tightening. While Japan’s disaster and Europe’s debt woes are clouding the global outlook, Premier Wen Jiabao’s government is more focused on the estimated 5 percent jump in consumer prices last month, said analyst Shen Jianguang.

It’s “very significant” that China raised rates before the March inflation data has even been announced, said Shen, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank. “This is a good preemptive move.”

Crude extended its decline. Oil for May delivery on the New York Mercantile Exchange dropped as much as 97 cents to $107.50 a barrel and was at $107.95 at 12:45 p.m. London time.

‘Hot Money’ Concern

Chinese officials may be on guard against increased inflows of “hot money,” or speculative capital, as today’s move widens the differential with rates in developed economies. In the U.S., the Federal Reserve has kept its benchmark near zero since December 2008.

Qu Hongbin, chief economist for China at HSBC Holdings Plc in Hong Kong, said a policy of “gradual” yuan appreciation likely remains intact. The Chinese currency, described by the U.S. as “substantially undervalued,” gained 4 percent against the dollar in the past year and touched 6.5452 on April 1, the strongest level since 1993.

Premier Wen last month described inflation as “a tiger” that once set free will be difficult to cage, and also as a potential threat to social stability. “Exorbitant” house price increases in some cities are a top public concern, he said.

China’s inflation accelerated to 5.2 percent last month, the fastest pace since July 2008, according to the median estimate in a Bloomberg News survey of nine economists. Consumer prices jumped 4.9 percent in February from a year earlier, topping the government’s full-year target of 4 percent.

‘Not Too Worried’

Today’s announcement contrasted with central bank Deputy Governor Yi Gang saying March 23 that interest rates were at a “comfortable” level and that he was “not too worried” by inflation because price increases will slow in the second half of the year. The interest-rate move may signal the government’s confidence in the strength of an economy forecast by the World Bank to expand 9 percent this year.

A purchasing managers’ index released April 1 indicated that the world’s second-biggest economy is “growing smoothly, with a very moderate slowdown,” Bank of America-Merrill Lynch economist Lu Ting said that day.

Rising oil and commodity costs and sustained economic growth may encourage Asian nations to keep boosting borrowing costs even as Japan faces an economic contraction in the aftermath of a record earthquake last month. Vietnam, Taiwan, India, South Korea and Thailand raised benchmark rates in March or April and Chinese officials have also drained cash from their economy by raising bank reserve requirements.

Economists’ Forecasts

China’s key lending rate will rise to 6.56 percent by year-end, with the deposit rate climbing to 3.5 percent, according to the median forecast in a Bloomberg News survey of economists on March 22. That suggests another 0.25 percentage point increase in each.

Besides monetary tools, the government has deployed subsidies, state food reserves and the threat of price controls to counter inflation. Unilever, the world’s second-largest consumer-goods maker, has postponed planned price increases at the government’s request.

The benchmark one-year deposit rate has lagged behind the pace of consumer-price gains, an incentive for households to switch savings to asset markets, increasing the risk of bubbles within the real-estate market.

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