China Raises Rates Again in Inflation Fight


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

However, it also lowered the rate for demand deposits -- those that can be withdrawn at any time -- to encourage savers to tie up their cash for longer periods rather than having it readily available to shift into shares or property.

China in fresh curb on bank lending - Dec-04The People’s Bank of China increased the one-year benchmark deposit rate by 27 basis points to 4.14 per cent, and the one-year lending rate by 18 basis points to 7.47 per cent.

China is battling inflation of 6.9 per cent, 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 a decade-long ”prudent” stance to prevent the economy from boiling over and keep inflation under control.

The central bank’s previous rate rise was on September 14. It has also raised the proportion of deposits that banks must hold in reserve 10 times this year to a record high 14.5 per cent and has imposed strict lending quotas on lenders to check credit growth. At the same time as raising one-year deposit and lending rates, the central bank cut the rate for demand deposits on Thursday by 9 basis points, to 0.72 per cent.

”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.”


Reuters
12/20/2007 6:58:12 AM