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China raises rates for 3rd time in 4 months

By Aaron Smith, staff writer

NEW YORK (CNNMoney) -- China's central bank said Tuesday it will raise its key lending and deposit rates by a quarter percentage point -- a move aimed at quelling inflation in the world's most populous nation.

The People's Bank of China is raising the one-year yuan lending rate to 6.06% from 5.81%, effective Wednesday. The bank also plans to increase its one-year deposit rate to 3% from 2.75%.

The bank most recently raised these interest rates on Dec. 25 and Oct. 20, 2010. The October increase was the first one in three years.

The purpose of the rate hikes is to rein in China's accelerating economic growth, which has resulted in higher food prices.

"The move was fully expected, given the strength of China's 2010 fourth-quarter GDP result, which left Beijing more room to intensify its tightening efforts," said Qu Hongbin, co-head of Asian Economics Research at HSBC, referring to China's recently reported growth of 9.8% on an annual basis.

"Interest rate hikes are essential for anchoring inflationary expectations and narrowing the negative interest rate gap, especially with CPI [the consumer price index] set to rebound to 5-6% in the coming months," Qu added.

"For the average consumer, people will feel that inflation is worse because you go buy food every day and food inflation is higher than 10%," said Tao Wang, China economist for UBS.

The Bank of China has also recently raised reserve requirements as a means of controlling growth.

U.S. and Chinese officials have clashed over Chinese policies in controlling their economy, particularly in keeping the yuan artificially undervalued in order to keep exports cheap.

Treasury Secretary Timothy Geithner, in a Monday speech in Sao Paulo, appeared to be referring to China when he said Brazil is being helped and hindered "by the policies of other emerging economies that are trying to sustain undervalued currencies."

A report from Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co., said the rate hike "is unlikely to be the last," noting that the "deposit rate is still below inflation."

"That said, interest rate policy is only one set of tools Chinese officials are using to stem price pressures," said the report. "Others include tapping strategic food reserves, threats of price controls and there have been reports of efforts to rein in hoarding."

Chandler said that even though the markets had been expecting the rate hike, "the timing of it is a bit of a surprise because it's the New Year celebration."

He said the impact on American investors will be negligible, because "Americans don't really borrow much from China."

-- CNN Beijing associate producer Jo Ling Kent contributed to this story. To top of page

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