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China raises key interest rates to fight inflation

BEIJING - China raised its benchmark interest rates on Thursday for the sixth time this year, in the latest in a series of tightening steps to contain inflation and prevent the world’s fourth-largest economy from overheating.

  • (Reuters)
  • Updated: Sat 4 Apr 2015, 9:41 PM

However, it also lowered the rate for sight deposits, in a move to encourage savers to keep their cash locked up for longer periods, rather than having it readily available to shift into assets such as shares or property.

The People’s Bank of China increased one-year benchmark deposit rates by 27 basis points to 4.14 percent, and lifted the one-year lending rate by 18 basis points to 7.47 percent.

”This move is to help prevent the rapidly expanding economy from boiling over and sectoral price rises from turning into conspicuous inflation,” the central bank said in a statement.

China is battling inflation of 6.9 percent, an 11-year high, which until now has been driven by soaring food prices but has shown worrying signs of spilling over to the broader economy.

Earlier this month China’s top leaders announced they would shift to a “tight” monetary policy from what they called a decade-long “prudent” stance to prevent the economy from overheating and keep inflation under control.

“The rate hikes are not surprising to me given the government’s repeated vows,” said Pan Jiang, head of research at Franklin Templeton Sealand Fund Management Co. in Shanghai. ”This has been factored into the stock market, but the property sector will take another hit.”

The central bank’s previous rate rise was on Sept. 14. It has also raised reserve requirements 10 times this year to a record high and has imposed strict lending quotas on commercial banks to check credit growth.

At the same time as raising one-year deposit and lending rates, the central bank cut sight deposits on Thursday by 9 basis points to 0.72 percent.

“People want to keep money in liquid forms, so they (the authorities) want to reverse that and pull money back into time deposits,” said Paul Cavey, an economist at Macquarie in Hong Kong. “If they’re able to reverse that, it can have a cooling effect on asset prices in China.”

Some analysts have said China would be reluctant to raise rates when the United States was in a cutting phase, lest it attract inflows of hot money that Beijing has been trying to discourage with capital controls.

China’s one-year yuan deposit rate now stands at 4.14 percent, a whisker below the US benchmark federal funds rate at 4.25 percent, and market forecasts point to more easing from the Federal Reserve while China moves in the opposite direction.


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