China Raises Rates Again; Speculation on Inflation Heightened

Fourth increase since October signals higher-than-expected numbers

China signaled Tuesday that its inflation figures, due out on April 15, might be higher than expected when it raised interest rates for the fourth time since October. Benchmark one-year deposit rates, effective April 6, will increase by 25 basis points to 3.25%; one-year lending rates will also increase by 25 basis points to 6.31%, the People’s Bank of China said on its website.

Reuters reported that this is yet another indication of China’s determination to combat inflation, following as it does six increases in the required reserve ratios of banks and the previous three interest rate increases.

Xu Biao, economist with China Merchants Bank in Shenzhen, was quoted in the report saying, "The March inflation figures must be very high. It is an aggressive move, and the central bank is acting more aggressively than the market had expected. The latest interest rate rise, although at only one quarter point, may hurt investor confidence and the real economy quite significantly. More importantly, it is not the end of China's monetary policy tightening."

Economists have been expecting the April release to show that inflation rose to 5.1% in March, which would match November’s figures—a 28-month high. While so far complaints within the country about inflation have not gone beyond words, in the past inflation has led to social unrest—something the Chinese government is anxious to avoid.

Inflation is becoming a global worry, with the European Central Bank (ECB) expected to raise its own rates on Thursday for the first time since the financial crisis began. Comments from some Federal Reserve policymakers in the U.S. have led to speculation that the U.S. might be considering a move toward tightening as well.

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