China raised interest rates for the third time this year on Wednesday, making clear that taming inflation remains a top priority even as the growth pace of its vast economy gently eases. The 25-basis-point increase in lending and deposit rates underscored China's quiet confidence that the world's second-biggest economy is resilient enough to endure tighter monetary policy and is not threatened by the hard landing that some investors fear.
Analysts suggested China was close to, or even at the end, of a cycle of rate rises and the latest move was a pre-emptive strike before another big jump in inflation in data next week heightens depositors' worries about low yields. "Today's rate hike suggests that China's June inflation could be higher than expected and the second-quarter GDP remains solid, consistent with our expectation," said Ligang Liu, head of Greater China economics at ANZ in Hong Kong.
"The rate hike will help the PBOC to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system." The latest move increases China's benchmark one-year lending rate to 6.56 percent, and its benchmark one-year deposit rate to 3.5 percent, the central bank said.
The increases will take effect from Thursday, the central bank said in a short statement on its website. Risky assets, particularly those with direct links to China's growth such as the Aussie dollar, sold off after the announcement, reacting to concerns this latest monetary tightening will choke an already sluggish global economy.
China-watchers couldn't agree on whether there would be more rate rises in the second half of the year. The People's Bank of China (PBOC) has raised banks' reserve requirements nine times in addition to these rate rises in its nine-month cycle of tightening monetary conditions. "China's inflation battle is almost at an end. Already, there are signs that price pressures are coming off," said Frederic Neumann, an economist at HSBC in Hong Kong. "Today's rate hike may therefore have been the last in the cycle,"
Hopes that the PBOC may be near a pause in tightening was seen as a positive for stocks and could halt the rise in yuan onshore swap rates. Such expectations have helped the Shanghai Composite index bounce from nine-month lows hit in June. The world's second-biggest economy expanded more than 10 percent last year but has cooled in 2011. First-quarter growth was 9.7 percent and data next week is expected to show the pace eased to 9.4 percent in the second quarter.
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