People's Bank of China (PBOC) Raises Rates by 0.25% to 5.81%; POTC Predicts Gold Breaks Below $1,150 in 2011 as China Tightens ..

BEIJING (Dow Jones)--China has decided to raise interest rates for the second time in slightly over two months, signaling the authorities' resolve to combat rising inflation despite concerns over intensifying capital inflows triggered by ultra easy monetary conditions in the U.S. and Japan.

Beijing's latest move also suggests the world's second-largest economy may be entering a relatively formal monetary tightening cycle and that policy-makers may have been convinced that the weapons used so far, such as credit rationing and artificial price controls, have failed to cool politically-sensitive consumer price pressures.

The People's Bank of China said Saturday that effective Sunday, it will raise the one-year yuan lending rate by 25 percentage points to 5.81% from 5.56%, and the one-year yuan deposit rate to 2.75% from 2.50%. The move comes after the central bank hiked on Oct. 19 the benchmark lending and deposit rates also by 25 percentage points each, the first rate hike in nearly three years.

Saturday's announcement shows that the PBOC will likely hike interest rates more often next year to curb overly ample liquidity and rising inflation, said Brian Jackson, an economist at the Royal Bank of Canada.

"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 Jackson.

"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, so today's move suggests Beijing is also coming around to this view," Jackson said. He expects 75 basis points of rate hikes in 2011.

The rate hike came one day after PBOC Deputy Governor Hu Xiaolian said the central bank will use a combination of tools, including interest rates and differentiated reserve requirement ratios to curb inflation and prevent asset price bubbles next year.

China has adopted various measures in the past few months in a bid to rein in inflation. The PBOC on Dec. 10 raised banks' reserve requirement ratio by 0.5 percentage points, requiring them to hold more deposit funds in reserve rather than lending them out, which marked its third hike in one month and the sixth such hike this year.

Beijing rolled out the tightening measures as inflation has become a growing threat to economic growth and social stability. The consumer price index rose 5.1% in November, the fastest increase in over two years. Some economists said they expect the CPI growth to further accelerate in December and January.

In December, the Politburo of the Communist Party, the highest decision-making body in China, also ratified a transition to a tighter monetary policy that has been in place for months, shifting its monetary policy stance to "prudent" from "moderately loose."

-Liu Li contributed to this article, Dow Jones Newswires; 8610-8400-7713; li.liu@dowjones.com

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(END) Dow Jones Newswires

December 25, 2010 06:44 ET (11:44 GMT)
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