April 5th, 2011
05:45 PM GMT
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Beijing, China (CNN) – China’s central bank surprised the market with its timing of an interest rate hike Tuesday.  The 0.25% hike is the fourth since October as the country tries to rein in inflation.

From Wednesday, the one-year deposit rate will stand at 3.25% and the one-year lending rate at 6.31 %.

The announcement came on a Chinese holiday and ahead of inflation data for March, being released next week, leading  to suggestions it was a pre-emptive strike to soften the market for the figures.

Qing Wang, economist with Morgan Stanley, said the hike has “a strong signalling effect.” He is picking consumer prices to come in at 5.2% year-on-year for March due to rising prices of food, fuel and housing.

China, like other economies around the globe, is caught between a need to rein in inflation and promote growth. But as the price of oil and other commodities continues to climb, hiking is winning out.

The European Central Bank could be next, with expectations it will raise interest rates by a quarter of a percentage point Thursday. It would be its first hike since 2008.

Dariusz Kowalczyk, of Credit Agricole CIB, expects the Chinese government to continue increasing its interest rates due to the rising prices. "Bank rates need to be higher than inflation," he said. "Otherwise, people will invest in houses and equities, leading to asset bubbles." He warns it could slow China’s growth.

But others believe rates could have peaked as the economy slows and inflation flattens out. Mark Williams, senior China economist with Capital Economics, thinks Chinese policymakers will opt to control credit growth by ordering banks to keep more cash in reserve.

The hike follows Chinese Premier Wen Jiabao’s March announcement to his nation's legislature that combating inflation would be the government's top priority in 2011.

With so many policymakers looking to fight inflation this year, how worried are you about rising prices?

soundoff (3 Responses)
  1. Simpelton

    Can you believe the United States includes China on their HUGE list of Countries whom they provide financial aid? There is a senator who is attacking foreign aid when we don't have the money to even do it. And the senate does not want his input. Kinda like still giving your 35 year old kid his allowance after graduating and becoming a rich lawyer eh?

    April 6, 2011 at 7:32 am |
  2. truthinanut

    There's no way China can continue to develop and remain at Third World market prices. Development is an increased standard of living, potentiated by increased wages, accommodated by increased prices. In China's case it's not inflation, it's modernization.

    April 6, 2011 at 3:04 pm |
  3. Nur

    very interesting pritensateonThanks for making this available to us mere mortals (ie the retail people with the actual money rather than the extra expensive layer of financial advisor intermediaries).I really appreciate this blog. its one of the few ways (beyong factsheets) that we mere mortals can actually get a feel for whats going on. This enables us to get a peek at the material that you guys generate for advisors which for some reason (bondvigilantes being an honorable exception) we dont normally see. Are we able to attend the conference call? Is there an archive of previous conf calls and advisor material? Please keep up the good workthanks

    September 2, 2012 at 9:08 pm |

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