2010-12-25 - China fights inflation with Christmas rate rise by suchenfz


									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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