China Hikes Rates to Tame Inflation

China has hiked interest rates amid overly ample liquidity and rising inflation, reports the Wall Steet Journal.


The South China Morning Post reports that rates have been unchanged for demand deposits but are up 34 basis points for three-month deposits, 30 points for six-month, two-year and three-year deposits, and 35 points for five-year deposits. Lending rates were almost evenly raised by 25 points for all tenors, with the rate on three-year loans or longer raised 26 points.


Quoting PBOC Deputy Gov. Hu Xiaolian, the Journal says the central bank will use a combination of tools, including interest rates and differentiated reserve requirement ratios, to curb inflation and prevent asset price bubbles next year.


Brian Jackson, an economist at the Royal Bank of Canada, expects rate increases to total three quarters of a percentage point in 2011. "We think it is increasingly clear that using quantitative measures--such as reserve ratios--to rein in liquidity and credit has not been enough, and that adjusting the price of credit—that is, interest rates—is needed to get price pressures under control," Jackson told the Journal.


China's banks are expected to benefit from the rate increase as it widens their spreads and is expected to boost profits.




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