China raises key interest rates again in an effort to slow down inflation

CHINA’S KEY interest rates rose yesterday after the country’s central bank announced its second increase since October on Christmas Day, sparking speculation that its bid to halt inflation will be focused on the first half of 2011.

The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.

Premier Wen Jiabao’s government aims to limit asset bubbles in the real-estate market and prevent rising prices from leading to social unrest after flooding the economy with cash from late 2008 to drive an economic recovery.

Officials may keep raising interest rates and banks’ reserve requirements, sell bills to soak up cash and allow more gains by the yuan against the dollar, according to JPMorgan.

“These policy moves could be front-loaded in coming months, as headline inflation figures remain high and economic growth faces overheating risks early next year,” said Wang Qian, the brokerage’s Hong Kong-based chief China economist.

The benchmark lending rate rose to 5.81 per cent, compared with 7.47 per cent before cuts from late 2008 to counter the global financial crisis. It will climb to 6.56 per cent by the end of next year, according to the median forecast in a Bloomberg News survey of economists this month.

The deposit rate increased to 2.75 per cent, compared with the 5.1 per cent annual pace of inflation in November.

China may raise rates as many as three times in the first half of next year, according to Morgan Stanley, while JPMorgan forecasts two increases in that period.

Officials have raised bank reserve ratios six times this year and trimmed loan growth from record levels. In June, they also scrapped the yuan’s almost two-year peg to the dollar as part of winding down crisis policies.

Since then, the currency has gained about 3 per cent, with non-deliverable forwards showing that traders are betting on a further increase of about 2 per cent in the next 12 months.

Wen said yesterday that “inflation expectations are more dire than inflation itself” and urged people to remain confident, the state-run Xinhua News Agency reported. The government can keep prices at a reasonable level through measures such as boosting agricultural output, he said in a radio broadcast, according to Xinhua.

A central bank survey this quarter showed consumers more concerned about inflation than at any time in the past decade as their savings lose value and companies such as McDonald’s push up prices for everyday purchases.

Consumer prices rose 5.1 per cent in November from a year earlier, the most in 28 months, mainly driven by food costs. Across 70 major cities, property prices climbed 7.7 per cent.

China’s latest rate increase may precede a year in which emerging-market central banks break away from their counterparts in the industrial world by tightening monetary policy.

Morgan Stanley economists forecast a period of “polarising policy paths” as officials from China to Brazil become increasingly confident that they can and should raise rates because of robust growth and accelerating inflation. At the same time, the Federal Reserve, the European Central Bank and the Bank of Japan will leave their benchmarks on hold throughout the year to bolster sluggish recoveries, they say.

The Morgan Stanley analysts predict 17 of 23 emerging nations they monitor will lift rates in 2011 including Brazil, China and India.

The likely policy split illustrates how the economic “centre of gravity” is shifting toward emerging nations, said David Cohen, an economist at Action Economics in Singapore. – (Bloomberg)