China to Raise Benchmark Interest Rate by 27 Basis Points


by alexda - Date: 2008-09-19 - Word Count: 519 Share This!

BEIJING, Sept. 14 (Xinhua) -- China will raise the one-year deposit and loan interest rates by 27 basis points to 3.87 percent and 7.29 percent respectively from Sep. 15, the central bank announced on Friday.

 

This is the fifth time that China has raised the one-year benchmark interest rates this year in a bid to curb rising inflation and tighten control over excessive liquidity.

 

The last interest rate hike came on Aug. 22 when the central bank raised the one-year deposit interest rate by 27 basis points to 3.6 percent and one-year loan interest rate by 18 basis points to 7.02 percent.

 

The move aims to "tighten credit control, rationalize investment and stabilize expectation of inflation", the People's Bank of China (PBoC) said in a statement on its website.

 

The latest interest rate hike was anticipated following the announcement that the consumer price index in August rose to an 11-year-high of 6.5 percent, sparking a stock market plummet of more than four percent on Tuesday, the largest daily drop since July 5.

 

Central bank governor Zhou Xiaochuan said last week that he would like to see an end to negative real interest rates, a signal of support for more rises in borrowing costs and cooling China's sizzling stock market.

 

Inflation risks pushed up by pork price hikes could not fully explain China's frequent use of retrenching monetary measures, and the major reason lay in the excessive money supply, said Song Guoqing, a researcher with Peking University.

 

To curb excess liquidity, China raised the reserve requirement ratio for a seventh time since this year on Sep. 6 and has issued 800 billion yuan of special treasury bonds to buy foreign exchange reserves to finance the planned state investment firm.

 

China's money supply remains too much despite a slowdown of M

2 in August, said Song.

 

Newly released data of the central bank shows that China's broad measure of money supply, M2, which covers cash in circulation and all deposits, rose by 18.09 percent in August, lower than the 18.48 percent recorded in July, but still above a high level of 18 percent.

 

The central bank figures also indicated that, during the first eight months, China's new renminbi-dominated loans reached 3.08 trillion yuan, nearly last year's total, pushing up urban fixed assets investment by 26.7 percent in the first eight months.

 

Bert Hofman, World Bank lead economist for China, said more monetary tightening measures were required in the near future and should be combined with fiscal and structural policy measures.

 

"It would minimize possible negative impacts to the macro economy for the central bank to raise the benchmark interest rate step by step, rather than a one-time sharp rise by two or three percent," said Guo Tianyong, director of the Banking Research Center under the Central University of Finance and Economics.

 

China raised the one-year deposit and loan interest rate by 27 basis points in March, by 27 and 18 basis points respectively in May, by 27 basis points both in July, and reduced the withholding tax on interest income to five percent from 20 percent as of Aug. 15.

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