China raises interest rates amid inflation fight

China’s Central Bank Governor Zhou Xiaochuan

July 06, 2011, Wednesday/ 16:39:00

China raised a key interest rate Wednesday for a third time this year as it tries to cool surging inflation. The benchmark rate for one-year loans will be raised 0.25 percentage points to 6.56 percent, effective Thursday, the central bank announced.

The rate paid on deposits will rise by a similar margin to 3.5 percent. Inflation hit a 34-month high of 5.5 percent in May and is believed to have risen further in June even as an overheated economy cools gradually under the pressure of investment curbs and other controls. The slowdown in some industries has prompted fears more interest rate hikes might trigger a sharp slump. But most analysts say the government should be able to avoid that. “Benchmark lending rates are still low relative to the pace of economic growth,” said Capital Economics analyst Mark Williams in a report. Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power and can fuel unrest.

The Cabinet’s planning agency says June inflation, due to be reported next week, is likely to exceed May’s level due to a jump in food costs blamed on summer floods that damaged crops. Private sector forecasters say June inflation could pass 6 percent. They say the mix of rapid growth and higher inflation means Beijing should further tighten access to credit. Analysts blame the inflation spike on the dual pressures of rising consumer demand that is outstripping food supplies and a bank lending boom that was part of Beijing’s response to the 2008 global crisis. Beijing relies less than other major governments on interest rates to regulate the economy. Instead, it uses more targeted controls such as loan quotas while avoiding across-the-board rate hikes that push up borrowing costs for state companies.

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