Rapid growth prompts China rate rise


China raised interest rates on July 20 in the latest of a series of tightening steps aimed at keeping inflation in check and preventing the world’s fourth-largest economy from overheating.

The increase came a day after the government reported that annual growth accelerated to 11.9 per cent in the second quarter, the fastest rate in 11 years, from 11.1 per cent in the first quarter.

The People’s Bank of China, the central bank, ordered an increase of 0.27 percentage point in commercial banks’ benchmark one-year deposit and lending rates.

That will take the one-year benchmark deposit rate to 3.33 per cent from 3.06 per cent. The one-year lending rate will rise to 6.84 per cent from 6.57 per cent.

Economists were not surprised by the increase, which takes effect on Saturday.

”It’s very much in line with what the market had anticipated,” said Kamal Sharma, currency strategist with Bank of America in London.

”We have had very strong Chinese data in the past few days; the surprise would have been if China did not move. Further hikes are still very much on the cards. In the absence of moves in the exchange rate, domestic monetary policy is the best way to curb growth.”

The central bank has now raised interest rates five times since April 27, 2006. It has also raised banks’ reserve requirements eight times since June 2006.

”This interest rate adjustment will help to guide reasonable growth of credit and investment, adjust and stabilise expectations about inflation and maintain basic stability of general price levels,” the central bank said on its Web site.

The central bank also raised the interest rate on sight deposits to 0.81 per cent from 0.72 per cent, the first time it has adjusted that rate since February 2002.

Chinese interest rates rise or fall in increments that are divisible by nine because it makes calculations easier for banks, which charge interest based on a 360-day year.

One reason economists expected a rate rise is that consumer inflation accelerated to 4.4 per cent in the year to June, the fastest pace in 33 months.

That high rate of inflation puts deposit rates well into negative territory, giving savers an incentive to take money out of the bank to bet on the red-hot stock market.

Friday’s increase is the first in two months.

On May 18, the central bank raised the benchmark lending rate by 0.18 percentage point and the deposit rate by 0.27 percentage point – at the same time increasing banks’ required reserves and widening the yuan’s daily trading band against the dollar.

 


Reuters
7/20/2007 5:59:28 AM