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 per cent from 6.06 per cent, 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 per cent from 3 per cent.
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 per cent 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 pre-emptive move.”
Crude oil extended its decline after the announcement. Oil for May delivery on the New York Mercantile Exchange fell as much as 97 cents, or 0.9 per cent, to $107.50 a barrel and was at $107.58 at 11.05 am London time. Today’s rate increase is the fourth since mid-October.
Inflation estimate
Inflation accelerated to 5.2 per cent 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 per cent in February from a year earlier, topping the government’s full-year target of 4 per cent.
Today’s move 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 the pace of price increases will slow in the second half of the year.
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 the economy by raising bank reserve requirements.
Stability threat
Wen has described inflation as a tiger that “once set free will be very difficult to put back into its cage” and also as a potential threat to social stability.
Besides monetary tools, the government has deployed subsidies, state food reserves and the threat of price controls. 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.
Purchasing managers’ indexes released April 1 indicated that the economy is maintaining momentum even as the government boosts borrowing costs and cracks down on real-estate speculation.
