China raises interest rates as it continues to battle inflation

6th July 2011

Benchmark one-year lending rates will be raised 25 basis points to 6.56%, while one-year deposit rates will go up 25 basis points to 3.5% the central bank said.

Beijing has become increasingly concerned that low interest rates in the developed economies are driving up the cost of commodities and fuelling inflation in the rest of the world, reports the Guardian.

The bank had warned earlier this week that it faced "large" inflationary pressures, and the interest rate rise, which will take effect on Thursday, is the third this year. Inflation in China hit 5.5% in May, and is thought to have risen further last month, says the report.

China has also used a series of other tools, including raising bank reserve requirements, to bring growth under control and prevent prices from spiralling.

Analysts said Wednesday's move could be the last rate rise in the immediate future, amid evidence that growth is starting to slow.

The rise suggests that inflation is likely to have accelerated to a three-year high of more than 6% in June, well beyond Beijing's comfort zone. The government is scheduled to announce the inflation figure next week, says the Financial Times (paywall).

Chinese investors and economists had debated in recent days whether the central bank would raise rates again.

"Long-term investors' may start to worry that China is tightening rates just as growth is slowing down," said Kathleen Brooks, research director at Forex.com in the Daily Telegraph. China entered 2011 with a target of 4 per cent inflation.

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