UPDATE 2-China fights inflation with Christmas rate rise

* China raises benchmark deposit rates to 2.75 pct

* Second rise in just over 2 mths underlines inflation woes

* Inflation is running at its highest in more than 2 years

(Adds analyst comment, details)

By Ben Blanchard and Zhou Xin

BEIJING, Dec 25 (BestGrowthStock) – China’s central bank raised
interest rates on Saturday for the second time in just over two
months as it stepped up its battle to rein in stubbornly high
inflation.

The People’s Bank of China said it will raise the benchmark
lending rate by 25 basis points to 5.81 percent and lift the
benchmark deposit rate by 25 basis points to 2.75 percent.

The central bank said in a statement on its website
(www.pbc.gov.cn) that the latest rate rise would take effect on
Sunday.

The move came after Beijing said earlier in December it was
switching to a “prudent” monetary policy, from its earlier
“moderately loose” stance.

Analysts said the change of wording, along with a recent
pledge by top leaders to make inflation fighting a top priority
for 2011, could pave the way for more interest rate increases
and lending controls.

“This rate hike demonstrates Chinese authorities’
determination to keep inflation under control up front, or
front-loaded tightening,” said Qing Wang, chief China economist
at Morgan Stanley in Hong Kong.

“Compared to rate hikes in the beginning of next year, a
rate hike before year-end will have a more tightening impact, as
the interest rates on the medium- and long-term loans and
deposits are reset at the beginning of each year according to
the base rates.”

The central bank said on Friday it will deploy a range of
policy tools to head off inflationary pressures and asset
bubbles. [ID:nTOE6BN05Q]

To tame price pressures, China raised interest rates on Oct
19 for the first time in nearly three years. The consensus of
analysts polled by Reuters this month was for three rate rises
of 25 basis points each by the end of next year.

Along with playing a key role in the fight against
inflation, policy tightening also signals the government’s
confidence that the world’s second-largest economy is on solid
ground, even as the U.S. and European recoveries remain fragile.

CHRISTMAS SURPRISE

While almost all investors and analysts thought more policy
tightening was coming, there was uncertainty about whether the
central bank would raise rates before the end of the year.

The central bank opted to raise banks’ reserve requirements
on Nov 19 ahead of data which showed inflation hit a 28-month
high of 5.1 percent.

“We expected a rate hike by the end of the year, though
Christmas Day is something of a surprise — a rate hike is not
normally on the wish-list for Santa Claus, but in China’s case
this is a prudent move,” said Brian Jackson, economist with
Royal Bank of Canada in Hong Kong.

“We think it is increasingly clear that using quantitative
measures, such as reserve ratios, to rein in liquidity and
credit has not been enough, and that adjusting the price of
credit — that is, interest rates — is needed to get price
pressures under control.”

Chinese stock markets have shed nearly 10 percent since
mid-November on concerns the government would ratchet up its
monetary policy tightening in face of rising inflation.

China has also officially increased banks’ required reserve
requirements six times this year and restricted lending by them.

In addition, Beijing has taken a slew of steps to cool the
property sector, trying to ward off a potential asset bubble.
(Additional reporting by Niu Shuping, and Jason Subler in
Shanghai, Writing by Kevin Yao; Editing by Koh Gui Qing,
Benjamin Kang Lim and Mike Nesbit)

UPDATE 2-China fights inflation with Christmas rate rise