China Boosts Interest Rates Again

Second increase in less than two months tries to combat inflation

For the second time in less than six weeks, China raised its interest rates in its continuing battle against inflation at home. The raise will take effect on Feb. 9, and raises benchmark one-year deposit rates to 3%, a 25-basis-point increase, and one-year lending rates to 6.06%, also a 25-basis-point increase.

Reuters reported that the increase comes to combat an expected January rise in the inflation rate. While inflation slowed in December to an annual rate of 4.6%, it is expected to be on the upswing again, fueled by higher food costs. While the rate hike itself was expected, its timing was a surprise, coming as it did on the last day of the Lunar New Year holiday celebrating the Year of the Rabbit.

Commodity markets fell on the news, expecting less demand, and the FTSEurofirst 300 index also fell.

This is China’s third rate increase since October. It is hoped that the increases will encourage Chinese citizens to leave their money in the banks, and discourage them from increasing the demand for mortgage loans. With the second largest economy in the world, China has the potential to have a major effect on the rest of the world, although analysts expect that if its economy slows, the effects will be only moderate. They also foresee further rate increases later in the year, as do economists.

Lian Ping, chief economist at the Bank of Communications in Shanghai, said in a statement, "The major reason behind this move is that consumer inflation in recent months is rising faster, and we expect the upward pressure to continue until the second quarter. Some time in the first half of this year, the CPI inflation may hit 6%, which will throw the real deposit rate into wider negative territory. So it is necessary for the central bank to raise interest rates at this point, and we expect at least two more interest rate rises for the rest of this year."

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