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
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.
“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.