China hikes rates amid inflation fight

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BEIJING— Reuters
Published Wednesday, Jul. 06, 2011 7:17AM EDT
Last updated Wednesday, Jul. 06, 2011 8:13AM EDT

China raised interest rates for the third time this year on Wednesday, making clear that taming inflation remains a top priority even as its vast economy gently eases.

The 25-basis-point increase in lending and deposit rates underscores China’s quiet confidence that the world’s second-biggest economy is resilient enough to take tighter monetary policy in its stride, and is not threatened by a hard landing that some investors fear.

“China’s inflation battle is almost at an end. Already, there are signs that price pressures are coming off. Today’s rate hike may therefore have been the last in the cycle,” said Frederic Neumann, an economist at HSBC in Hong Kong.

The latest move increases China’s benchmark one-year lending rate to 6.56 per cent, and lifts its benchmark one-year deposit rate to 3.5 per cent, the central bank said.

The increases will take effect from Thursday, the central bank said in a short statement on its website.

But with growing evidence that China’s vast manufacturing sector is easing on the back of tight policy at home and softening demand abroad, some economists think Beijing may be near the end of its nine-month-long policy tightening cycle.

With U.S. interest rates near zero, Beijing also worries it would attract more speculative funds into China if it raises rates too far. That would exacerbate the problem of excess liquidity and further fuel inflation.

China’s inflation quickened to a 34-month high of 5.5 per cent in May as elevated food prices and a red-hot property market kept price pressures alive.

Beijing is especially sensitive to rising prices as it worries that could stir social unrest and threaten its leadership.

Wang Jun, an economist at CCIEE, a government think tank, said Beijing may feel compelled to raise rates again if inflation proves more stubborn than expected.

“If inflation comes down, there will be no need to raise rates. But if prices rebound, there could be further rate rises,” he said.