April 5th, 2011
05:45 PM GMT
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?
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