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China raised interest rates on Tuesday for the fourth time this year, aiming to counter expectations of accelerating inflation after consumer prices rose in July at the fastest pace in more than a decade.
The People's Bank of China (PBOC) increased the rate that banks pay for one-year deposits by 27 basis points to 3.60 percent, and the corresponding benchmark for lending rates by 18 basis points, to 7.02 percent from 6.84 percent. The central bank said the increases, which take effect on Wednesday, were designed "to reasonably control credit growth and to stabilise inflationary expectations".
Although the timing was a surprise, most economists had forecast an increase, both to calm growing popular unease over inflation and to encourage savers to keep their money in the bank instead of piling into the surging stock market.
"The PBOC is concerned about falling real deposit rates spurring the flow of funds out of deposits into equities. We don't think this is a response to strong (economic) growth," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.
Even after the latest increase, one-year certificates of deposit badly lag the consumer inflation rate, which jumped to 5.6 percent in the year to July, the fastest pace since early 1997, because of a spike in the cost of pork, eggs and other foods.
Lin Songli, an analyst with Guosen Securities in Beijing, noted that the central bank had raised lending rates less than deposit rates, even though the economy expanded 11.9 percent in the second quarter from a year earlier.
By doing this the PBOC was signalling that the pace of growth was not its main concern. "The move is mainly targeting inflation, and the authorities might have reached a consensus that investment growth is not a big problem now," Lin said.

Copyright Reuters, 2007

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