China central bank raises benchmark interest rate

BEIJING—China’s central bank said Wednesday it will raise its benchmark deposit and lending rates by 25 basis points, the third rate hike this year, in the latest round of monetary tightening.

The move comes as the government places priority on fighting rising inflation and despite recent fears of an economic slowdown in China.

China’s consumer price index rose 5.5 percent in May from a year earlier, up from 5.3 percent in April and the fastest pace in nearly three years.

Analysts widely expect inflation to top six percent in June before easing in the second half of the year.

The rate rise comes after Chinese Premier Wen Jiabao said controlling inflation is his government’s top priority, made more pressing after the price of pork – China’s most popular meat – soared 54 percent year on year at the end of May.

“Stabilizing the general level of consumer prices remains the top priority of our macroeconomic regulation,” Wen said in remarks posted on his government’s website Tuesday.

“Prices will be effectively controlled when government policies take effect.”

With the world’s second-largest economy, China has become integral to driving the global economic recovery.

A slowdown in China’s growth due to efforts at fighting inflation could impact the recoveries of its major trading partners, including the United States, Europe and Japan.

Despite the latest tightening, consensus among economists remains that Beijing may become more cautious about further rate hikes later this year due to signs of a slowdown.

“This hike is in line with our forecast of one rate hike in July, and is also well expected by the market,” Lu Ting, China economist for Bank of America told AFP.

“We believe market impact could be quite limited. In fact, markets might even feel a bit relieved as the shoe of rate hikes finally falls… we expect no more rate hikes for the rest of 2011.”

In a statement on its website the People’s Bank of China, the central bank, said it will raise the one-year yuan lending rate to 6.56 percent from 6.31 percent, and the one-year yuan deposit rate to 3.50 percent from 3.25 percent.

The move, which comes into effect Thursday, follows a PBOC announcement of increases to its benchmark lending and deposit rates on April 5 and February 8, after two such hikes in 2010.

The PBOC also raised banks’ required reserve ratio, the amount of deposits required by banks to be held in reserve, six times in 2010 and six times so far this year.