In second raise in two months, lending rates increased by 25 bps.
China raised interest rates for the second time in just over two months after consumer prices jumped the most in 28 months and the government forecast “relatively high” inflation in the first half of 2011.
The benchmark one-year lending rate will rise by 25 basis points to 5.81 per cent and the one-year deposit rate will climb by the same amount to 2.75 per cent, effective tomorrow, the People’s Bank of China said in a statement on its website today.
Bank lending and a higher-than-forecast trade surplus have pumped more cash into an economy already awash with money. Today’s rate increase may not be the last as Premier Wen Jiabao shifts the nation’s monetary policy to a tighter stance and focuses on slowing gains in property and consumer prices that are making it harder for households to afford homes and pay for food.
November’s “alarming” inflation data reflects wage increases, rapid money and credit expansion, rising oil and commodity prices and food costs, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the European Central Bank. “Interest rate hikes to reduce negative real interest rates and anchor inflation expectations are very necessary,” Shen said before today’s announcement.
Affordable housing
Concern that the government would increase interest rates and slow expansion in the world’s fastest-growing major economy spurred an 11 percent selloff in the benchmark Shanghai Composite Index of stocks in November. The index jumped 2.9 per cent on Dec. 13, the biggest gain in eight weeks, after the central bank ordered lenders to set aside more money as reserves to rein in liquidity rather than boosting borrowing costs.
Today’s move indicates officials are less concerned about the durability of a recovery in exports to economies including the U S, after overseas sales rose to a record $153.3 billion last month and the trade surplus topped $20 billion for the fifth time in six months.
Policy makers are instead focusing on reducing liquidity and curbing price increases that have now extended beyond seasonal fluctuations in food prices. China on December 11 reported 5.1 per cent inflation for November, the highest in 28 months, a week after Chinese leaders said monetary policy will shift to a “prudent” stance from the “moderately loose” position adopted to support the economy amid the global financial crisis.
Petrol prices
Residence-related costs, including charges for water, electricity and rent, jumped 5.8 per cent last month from a year earlier, the most in more than two years, and consumer goods prices rose 5.9 per cent, the biggest gain since August 2008, according to statistics bureau data.
China raised gasoline and diesel prices by as much as 4 per cent on December 22 to reflect higher global costs of oil. Still, the increase was less than half of the gain in crude prices over the previous month and the nation’s planning agency said it limited the rise because of the “rapid increase in overall prices.”
Inflation is expected to reach 3.3 per cent for the whole of this year, breaching the government’s target of 3 per cent, Peng Sen, vice chairman of the National Development and Reform Commission, told state television on December 21. The commission raised its expectation of average gains in consumer prices next year to 4 per cent, state television reported on December 14.
‘Long-term battle’
The nation must prepare for a “long-term battle” against price increases, Peng was quoted as saying on December 21. The root causes of inflation have yet to be resolved, he said, citing domestic supply shortages, gains in global commodity prices and excessive liquidity.
Consumer price increases could accelerate to more than 6 per cent in coming months, Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland, said in a December 11 note.
China is tightening after a record expansion of credit to counter the effects of the world financial crisis.
