Interest rate raised to curb inflation

By Xin Zhiming (China Daily)
Updated: 2007-08-22 07:11

The central bank raised interest rates yesterday for the fourth time this year to control money supply and rising prices.

Effective today, the interest rate on bank deposits is raised by 27 basis points, and the lending rate by 18 basis points, the People's Bank of China (PBOC) said on its website.

After the hikes, the benchmark one-year deposit rate is 3.6 percent while one-year lending rate is 7.02 percent.

The demand deposit interest rate remains unchanged at 0.81 percent.

The central bank said the move is aimed to "control money supply and credit, and stabilize inflation expectation".

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The annual growth in the broad measure of money supply, M2, grew by 18.5 percent in July, 1.42 percentage points higher than in June and the fastest this year.

The annual growth in the consumer price index (CPI) surged to 5.6 percent in July, the highest in a decade.

"The interest rate hikes, therefore, are in line with expectation," said Zhao Xijun, finance professor at Renmin University of China.

"The authorities may fear the high inflation, driven mainly by rising food prices, may lead to more general price spikes and spill over to other sectors," he told China Daily.

The unparalleled series of revisions in the lending rates are aimed at reducing bank lending, said Hu Shaowei, senior economist with the State Information Center.

"By raising the lending rates by a smaller margin, policymakers aim to prevent banks from providing too much credit, which has pushed fixed-asset investment growth," he told China Daily.

In the first seven months, new banks loans amounted to 2.77 trillion yuan ($364.5 billion), already exceeding the authorities' target of 2.5 trillion yuan for 2006.

The annual growth rate in urban fixed-asset investment, meanwhile, rose to 26.6 percent in the first seven months, 2.1 percentage points higher than the growth rate last year.

The smaller margin in the revision of lending rates can also mean that policymakers do not want to see the gap between domestic lending rates and those of the US further expand as the US Federal Reserve has recently cut its discount rate, Zhao said.

"An increasing gap may attract more capital influx, which will increase the pressure on yuan revaluation."

The stock market may be affected temporarily as some funds may be withdrawn, said Chen Jijun, analyst with Beijing-based CITIC Securities. But in the mid- to long-term, it will make economic growth more sustainable, which is good for the equities market.

"Without proper macroeconomic regulation, economic growth will be too fast to sustain," he told China Daily.

(China Daily 08/22/2007 page1)

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