China raises interest rates in surprise move

China's central bank today raised interest rates for the first time in nearly a decade in a surprise move that was the boldest…

China's central bank today raised interest rates for the first time in nearly a decade in a surprise move that was the boldest yet aimed at guiding a heated economy into slower growth.

The announcement of the rise of just over quarter of a percentage point by the People's Bank of China marked a shift away from the central directives the government has so far used to cool the world's seventh-biggest economy.

The central bank raised the benchmark rate on one-year yuan loans to 5.58 per cent from 5.31 per cent and the rate on one-year deposits to 2.25 per cent from 1.98 per cent.

"This move is obviously trying to rein in investment further and engineer a soft landing," said Ms Sarah Hewin, senior economist at American Express Bank in London.

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China's economy has become a major factor on global markets, sucking in imports from the rest of the world and helping to drive up prices of oil and other global commodities.

It has slowed for several quarters in a row, but grew a still-robust 9.1 per cent in the year through the third quarter, prompting the government to keep in place measures to slow breakneck investment and lending.

Beijing had held off raising rates out of fear that higher borrowing costs would make it harder for struggling state-owned firms to repay debts to banks.

Earlier measures included raising bank reserve requirements, banning new investment in some sectors, and imposing tougher rules on converting land to industrial use.

But those steps did not appear to be enough to keep a lid on inflationary pressures. Consumer prices rose 5.2 per cent in the year to September.

The last time China raised lending rates was in July 1995, and rates were last changed in February 2002, when they were lowered to boost a slowing economy.

Chinese policy makers have traditionally focused on pumping up economic growth to create jobs and ensure social stability amid wrenching reforms that have thrown millions out of work as the country abandons central planning.