China fights inflation with Christmas rate rise December 25, 2010 – The National Post BEIJING — China’s central bank raised Along with playing a key role in the fight interest rates on Saturday for the second time against inflation, policy tightening also signals in just over two months as it stepped up its the government’s confidence that the world’s battle to rein in stubbornly high inflation. second-largest economy is on solid ground, even as the U.S. and European recoveries The People’s Bank of China said it will raise remain fragile. the benchmark lending rate by 25 basis points to 5.81% and lift the benchmark deposit rate While almost all investors and analysts by 25 basis points to 2.75%. thought more policy tightening was coming, there was uncertainty about whether the The central bank said in a statement on its central bank would raise rates before the end website (www.pbc.gov.cn) that the latest rate of the year. rise would take effect on Sunday. The central bank opted to raise banks’ reserve The move came after Beijing said earlier in requirements on Nov 19 ahead of data which December it was switching to a “prudent” showed inflation hit a 28-month high of 5.1%. monetary policy, from its earlier “moderately loose” stance. “We expected a rate hike by the end of the year, though Christmas Day is something of a Analysts said the change of wording, along surprise — a rate hike is not normally on the with a recent pledge by top leaders to make wish-list for Santa Claus, but in China’s case inflation fighting a top priority for 2011, could this is a prudent move,” said Brian Jackson, pave the way for more interest rate increases economist with Royal Bank of Canada in and lending controls. Hong Kong. “This rate hike demonstrates Chinese “We think it is increasingly clear that using authorities’ determination to keep inflation quantitative measures, such as reserve ratios, under control up front, or front-loaded to rein in liquidity and credit has not been tightening,” said Qing Wang, chief China enough, and that adjusting the price of credit economist at Morgan Stanley in Hong Kong. — that is, interest rates — is needed to get “Compared to rate hikes in the beginning of price pressures under control.” next year, a rate hike before year-end will Chinese stock markets have shed nearly 10% have a more tightening impact, as the interest since mid-November on concerns the rates on the medium- and long-term loans and government would ratchet up its monetary deposits are reset at the beginning of each year policy tightening in face of rising inflation. according to the base rates.” China has also officially increased banks’ The central bank said on Friday it will deploy required reserve requirements six times this a range of policy tools to head off inflationary year and restricted lending by them. pressures and asset bubbles. In addition, Beijing has taken a slew of steps To tame price pressures, China raised interest to cool the property sector, trying to ward off a rates on Oct 19 for the first time in nearly potential asset bubble. three years. The consensus of analysts polled by Reuters this month was for three rate rises of 25 basis points each by the end of next year.
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