UPDATE 3-China ups rates 4th time since Oct, March inflation may be high

* Fighting inflation is Beijing’s top priority this year

* Rate rise comes ahead of March inflation data next week

* Analysts say move could suggest March inflation strong

* One-year deposit rate 3.25 percent, lending 6.31 percent

* Rates increased 25 basis points, effective Wednesday

(Adds more quotes, details)

By Soo Ai Peng and Tony Zhou

SHANGHAI/BEIJING, April 5 (Reuters) – 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.

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. [ID:nLDE7340FY]

“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).”

INFLATION PRESSURES

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 (UNc.AS: Quote, Profile, Research) 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. [ID:nL3E7F200V]

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. [ID:nTOE72F01E]

Purchasing managers’ surveys last week also showed price
pressures were easing. [ID:nL3E7F104Q]

GLOBAL CONCERN

Most central banks in emerging markets in Asia and Latin
America have raised interest rates as the regions emerged
strongly from the global financial crisis.

But major central banks in the developed world are now
showing signs of starting to catch up.

The European Central Bank is expected to raise interest
rates on Thursday by 25 basis points to 1.25 percent after
inflation rose above its target. [ID:nSLAUEE7RO]

Comments from some Federal Reserve policymakers have raised
market expectations that the U.S. central bank is moving towards
a tighter policy.

So far, complaints among Chinese about rising prices have
amounted to little more than grumbles, but serious inflation has
sparked social unrest in China in the past.

“This is ultimately good news because it reduces the risk of
policy error in China that markets were getting nervous about,”
Benoit Anne, head of emerging markets strategy at Societe
General, said of the rate rise.

“It reduces the danger of Chinese policymakers being too
dovish and shows them addressing the mounting inflation risk
which is a massive tail risk for emerging markets. We will see a
few more hikes as China needs more monetary tightening.”

The central bank boosted bank reserves, or the amount of
cash that banks have to put aside, by 50 basis points to 20
percent on March 18.

The move locks up cash that banks could otherwise lend out
and potentially fuel inflation. Excess cash stemming from
China’s vast trade surplus has been a root cause of the
country’s inflation.

(Additional reporting by Kevin Yao, Zhou Xin and; Writing by
Koh Gui Qing and Neil Fullick; Editing by Dean Yates)

UPDATE 3-China ups rates 4th time since Oct, March inflation may be high