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China raises interest rates for third time this year to tackle inflation

July 6, 2011 |  5:30 am

Photo: A butcher sells pork at a market in Shenyang, northeast China. China's central bank raised interest rates Wednesday to tackle rising inflationary pressure fueled mostly by soaring food prices. Pork prices rose more than 40% in May compared with a year earlier. Credit: EPA China raised its benchmark interest rates for the third time this year in a clear move to tackle inflation, which hit a 34-month high in May.

The People's Bank of China said Wednesday it hiked the rates by 0.25 percentage points each, lifting the benchmark one-year lending rate to 6.56% and the benchmark one-year deposit rate to 3.5%.

The moves come amid speculation that China's consumer price index, the country's main gauge of inflation, could hit a three-year high in June. The government will announce the figures July 15.

Policymakers now face the threat of an economic slide or hard landing as credit growth is slowly curtailed. The country has already increased the amount of capital that banks must hold in reserves to record highs.

Already, there are some signs that China's overheated economy could be entering a modest cool-down period. An index of manufacturing activity fell to a 28-month low in June. Bankruptcies of small- and medium-sized companies are said to be rising.

Mark Williams, an analyst for Capital Economics, said interest rates were still low compared with the rate of economic growth, and that he believed enough credit would be available to avoid a deep slump.

"Higher borrowing costs from banks will make little difference in practice," Williams wrote in a note to clients. "Benchmark lending rates are still low relative to the pace of economic growth. The constraint on credit growth is the amount that banks can lend rather than the rates they charge."

Unlike other countries, China sets lending quotas for its banks -- a policy tool that often has far greater effect than interest rates.

Inflation in China has been led by rising food prices, the latest being the soaring cost of pork. Pig shortages and higher costs for grain led to a 40.4% year-on-year increase in consumer prices for the meat in May.

Central-government leaders are said to be sensitive to runaway prices because it could sow social instability.

In an editorial published last month in the Financial Times, Chinese Premier Wen Jiabao even went so far as to say prices would be kept firmly under control this year.

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-- David Pierson

Photo: A butcher sells pork at a market in Shenyang, northeast China. China's central bank raised interest rates Wednesday to tackle rising inflationary pressure fueled mostly by soaring food prices. Pork prices rose more than 40% in May compared with a year earlier. Credit: EPA

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