CHINA
China hikes interest rates for fourth time
Tuesday, August 21, 2007
China's central bank announced it would raise interest rates for the fourth time this year in an effort to curb inflation that last month climbed to its highest level in over a decade.
Tuesday, August 21, 2007
By AFP
China's central bank announced Tuesday it would raise interest rates for the fourth time this year in an effort to curb inflation that last month climbed to its highest level in over a decade.
The benchmark lending rate will rise by 0.18 percentage points and the benchmark deposit rate will go up by 0.27 percentage points on Wednesday, the People's Bank of China said in a statement on its website.
China's main bank lending rate will now be 7.02 percent, while the deposit rate jumps to 3.60 percent.
The decision was made "in order to reasonably adjust money and loan supply as well as stabilise inflation expectations," the statement said.
Economists had predicted that authorities would act quickly after data was released last week showing that China's economy was continuing to race ahead at a worryingly fast pace.
The biggest concern for the government was inflation hitting 5.6 percent in July from a year earlier, the highest rate in more than a decade.
Inflation was driven by a sharp 15.4-percent spike in food prices, with the price of meat rising 45.2 percent mainly because of a shortage of pork -- a staple of the Chinese diet.
China also last month posted a trade surplus of 24.4 billion dollars, the second-largest ever.
"The rate hike is within our expectations," said Qing Wang, China economist at Morgan Stanley.
"The main purpose is to amend inflationary expectations -- it should not be viewed as authorised monetary tightening, but instead, it should be viewed as a passive reaction to inflation."
Wang said he was expecting one more rate hike in the short term.
"To manage inflationary expectations, you need to maintain a tightening bias," he said.
Even before the official inflation data was announced last week, government officials were already voicing their worries about an overheating economy.
"Various economic indicators are on the rise, and they may enter into the alarm zone," Zhang Tao, vice director of the central bank's international department, was quoted by a state newspaper as saying.
"The objective now is to prevent the economy shifting from fast growth to overheating," Zhang said.
Stephen Green, a Shanghai-based economist at Standard Chartered Bank, said the central bank had however taken analysts by surprise by moving more on deposit rather than loan rates for the second time this year.
"Probably the more significant reason for this is that the People's Bank of China is aiming to encourage corporates to save more of their retained earnings, which are a more important source of investment funds than bank loans," he said.
Green also forecast at least one more rate hike before year's end, as he said the central bank seemed to be taking a more aggressive approach than some observers had expected.
China has already tried a wide range of measures to control the economy, which expanded at 11.9 percent in the second quarter and 11.5 percent during the first half.
Interest rates had already been raised three times this year, most recently on July 21.
The bank reserve ratio -- the amount of money banks must hold in reserve -- has also been increased six times to stem liquidity.
The benchmark lending rate will rise by 0.18 percentage points and the benchmark deposit rate will go up by 0.27 percentage points on Wednesday, the People's Bank of China said in a statement on its website.
China's main bank lending rate will now be 7.02 percent, while the deposit rate jumps to 3.60 percent.
The decision was made "in order to reasonably adjust money and loan supply as well as stabilise inflation expectations," the statement said.
Economists had predicted that authorities would act quickly after data was released last week showing that China's economy was continuing to race ahead at a worryingly fast pace.
The biggest concern for the government was inflation hitting 5.6 percent in July from a year earlier, the highest rate in more than a decade.
Inflation was driven by a sharp 15.4-percent spike in food prices, with the price of meat rising 45.2 percent mainly because of a shortage of pork -- a staple of the Chinese diet.
China also last month posted a trade surplus of 24.4 billion dollars, the second-largest ever.
"The rate hike is within our expectations," said Qing Wang, China economist at Morgan Stanley.
"The main purpose is to amend inflationary expectations -- it should not be viewed as authorised monetary tightening, but instead, it should be viewed as a passive reaction to inflation."
Wang said he was expecting one more rate hike in the short term.
"To manage inflationary expectations, you need to maintain a tightening bias," he said.
Even before the official inflation data was announced last week, government officials were already voicing their worries about an overheating economy.
"Various economic indicators are on the rise, and they may enter into the alarm zone," Zhang Tao, vice director of the central bank's international department, was quoted by a state newspaper as saying.
"The objective now is to prevent the economy shifting from fast growth to overheating," Zhang said.
Stephen Green, a Shanghai-based economist at Standard Chartered Bank, said the central bank had however taken analysts by surprise by moving more on deposit rather than loan rates for the second time this year.
"Probably the more significant reason for this is that the People's Bank of China is aiming to encourage corporates to save more of their retained earnings, which are a more important source of investment funds than bank loans," he said.
Green also forecast at least one more rate hike before year's end, as he said the central bank seemed to be taking a more aggressive approach than some observers had expected.
China has already tried a wide range of measures to control the economy, which expanded at 11.9 percent in the second quarter and 11.5 percent during the first half.
Interest rates had already been raised three times this year, most recently on July 21.
The bank reserve ratio -- the amount of money banks must hold in reserve -- has also been increased six times to stem liquidity.
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