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

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.23%4.19%
15 yr fixed3.26%3.27%
5/1 ARM3.70%3.38%
30 yr refi4.22%4.18%
15 yr refi3.26%3.26%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,279.74 13.75 0.08%
Nasdaq 4,579.79 -13.64 -0.30%
S&P 500 2,010.40 -0.96 -0.05%
Treasuries 2.59 -0.04 -1.60%
Data as of 1:59am ET
Company Price Change % Change
Yahoo! Inc 40.93 -1.16 -2.74%
Microsoft Corp 47.52 0.84 1.80%
Bank of America Corp... 16.95 -0.09 -0.53%
Oracle Corp 39.80 -1.75 -4.21%
Facebook Inc 77.91 0.91 1.18%
Data as of Sep 19

Sections

Law enforcement officials say Frank Tamayo was the middleman in a $5.6 million insider trading scheme that involved him eating pieces of paper to cover up the crime. More

Scotland's clear rejection of independence has eased fears that it could suffer the kind of decline seen in Quebec after it failed to break away from Canada. More

It's really good to be Larry Ellison. The Oracle founder is stepping down as CEO, so maybe he'll have more time to enjoy his glamorous life. More

As Occupy Wall Street goes on its debt-abolishing tear, thousands of people across the country are begging them to forgive their loans. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.