China ups rates fourth time since October

China's central bank increased interest rates on Tuesday for the fourth time since October, raising suspicions that data next week may show inflation rose more than expected in March. China's rate rise adds to six official increases in bank reserves since October and underlines Beijing's determination to clamp down on inflation, which leaders have declared as their most important task this year to keep the world's fastest growing major economy on track.
-- One-year deposit rate 3.25 percent, lending 6.31 percent
-- Rates increased 25 basis points, effective Wednesday
The increase comes before the European Central Bank is expected to raise its rates on Thursday for the first time since the global financial crisis, showing how inflation is rising to the top of the global policy agenda. "The March inflation figures must be very high," said Xu Biao, economist with China Merchants Bank in Shenzhen.
"It is an aggressive move, and the central bank is acting more aggressively than the market had expected. The latest interest rate rise, although at only one quarter point, may hurt investor confidence and the real economy quite significantly. More importantly, it is not the end of China's monetary policy tightening."
Benchmark one-year deposit and lending rates were lifted by 25 basis points to 3.25 percent and 6.31 percent respectively, the People's Bank of China said in a statement on its website. The rises take effect from April 6, when financial markets in China reopen following public holidays on Monday and Tuesday.
China is due to report the March consumer price index on April 15. Economists expect the data to show that consumer inflation rose to 5.1 percent in March, matching a 28-month high seen in November. Inflation was 4.9 percent in February, unchanged from January. Beijing is aiming for inflation to average 4 percent this year. Metals and crude prices eased after the news of China's rate rise on fears tighter policy will restrict the country's demand for commodities. The Australian dollar, a proxy currency for commodities, also fell. "We did expect a rate hike in April so it's not a complete surprise," said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.
"They are raising rates to stem the inflationary pressures in the economy. We expect another two hikes of 25 basis points each this year. We are already seeing a slowdown in the Chinese economy but they need to raise rates a couple more times.
"They will still use reserve requirement increases but they also need to raise rates. I think they will use different tools (to tackle inflation)." Food prices have been the main driver of China's inflation. Although monetary policy has little affect on food prices, since people have to eat, the tightening reflects concerns that price pressures will spread to other parts of the economy and so raise inflation expectations.
Underscoring those worries, consumer goods giants Procter & Gamble and Unilever had both planned to raise prices for detergent and soap by 15 percent this month, local media reported on March 28. Unilever agreed to comply with a request from authorities to postpone its price rises, the Financial Times reported on Saturday.
Sharply rising commodities prices, including international crude prices that are hovering around their highest levels in more than two years, are another inflation threat. The economy, which grew more than 10 percent in 2010, is vacuuming up commodities globally to satisfy the drive for growth. Analysts have said they expect inflation in China to peak around the middle of the year.
"This rate hike suggests that the March CPI that is to be released early next week may have surprised to the upside. Our current CPI forecast is 5.2 percent y/y for March," said Qing Wang, an economist with Morgan Stanley in Hong Kong, in a note to clients. "It also suggests that Chinese authorities are confident in the sustainability of underlying growth momentum."
There are some signs that the raft of monetary tightening, which has been accompanied with prices controls, is starting to take effect. Indeed, the central bank drained 300 billion yuan ($46 billion) in cash from money markets in March through open market operations after injecting cash in January and February, to add to the tightening. A central bank survey released in March showed more households were satisfied with current price levels and saw less chance of rising inflation.