China raises interest rates for 5th time in 2007

By Zhang Ran (China Daily)
Updated: 2007-09-14 18:36

The central bank raised interest rates for the fifth time this year on Friday as part of its continuing efforts to arrest the rising inflation graph and prevent the economy from overheating.

The benchmark one-year lending and deposit rates will be raised by 0.27 percentage points from September 15, the People's Bank of China, the central bank, said on its website.

That means the one-year lending rate will increase from 7.02 percent to a nine-year high of 7.29 percent, and the deposit rate will rise from 3.6 percent to 3.87 percent.

The last interest rate hike was on August 21.

"The move was predictable," BNP Paribas Peregrine Securities chief economist Chen Xingdong said. "Over the past months, the central bank has been trying to check the rising prices of consumer products, which now is the biggest concern of the government."

The consumer price index (CPI), a key gauge of inflation, rose to 6.5 percent in August, driven mainly by rising food prices and the highest since December 1996.

The supply of money grew 18.09 percent in August, exceeding the central bank's annual target of 16 percent for the seventh consecutive month. And urban fixed-assets investment rose 26.7 percent in the first eight months of the year.

"These figures in aggregate suggest a continuous strong growth momentum in the real economy amid excess liquidity," JP Morgan Securities (Hong Kong) chief economist Frank Gong said.

Given the latest macro developments, analysts said Friday's interest rate increase might not be the last this year. The central bank could raise it again in October, Chen said, while Gong forecast one more increase of 0.27 basic points by the end of the year, followed by another in the first quarter of next year.

Chen, however, felt Friday's interest rate hike will have very limited impact on the property and stock markets. "Even after the interest rate increase, the real deposit rate remains in negative territory. Since people still fear higher inflation in the following months, they will invest more in stocks or the property market," Chen said.

But China Jianyin Investment Securities Co senior analyst Li Zhikun disagreed. Given the series of money tightening moves, fixed-assets investment will finally be curbed, he said. This in turn could slow down public companies' growth prospects and help cool down the stock market in the long run.

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