China raised interest rates for a third time this year as it tries to cool surging inflation.
The benchmark rate for one-year loans will be raised 0.25 percentage points to 6.56 per cent from tomorrow, the central bank announced. The rate paid on deposits will rise by a similar margin to 3.5 per cent.
Inflation hit a 34-month high of 5.5 per cent in May and is believed to have risen further in June even as an overheated economy cools gradually under the pressure of investment curbs and other controls.
The slowdown in some industries has prompted fears more interest rate rises might trigger a sharp slump, but most analysts say that the Government should be able to avoid that.
“Benchmark lending rates are still low relative to the pace of economic growth,” said Capital Economics analyst Mark Williams.
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Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power and can fuel unrest.
The Cabinet’s planning agency said that June inflation, due to be reported next week, is likely to exceed May’s level due to a rise in food costs blamed on summer floods that damaged crops.
Private sector forecasters say that June inflation could exceed 6 per cent. They say the mix of rapid growth and higher inflation means Beijing should further tighten access to credit.
Analysts blame the inflation spike on the dual pressures of rising consumer demand that is outstripping food supplies and a bank lending boom that was part of Beijing’s response to the 2008 global crisis.
Beijing relies less than other major governments on interest rates to regulate the economy. Instead, it uses more targeted controls such as loan quotas while avoiding across-the-board rate rises that push up borrowing costs for state companies.
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The higher rates also will boost costs for local governments that borrowed from banks to pay for constructing highways and other public works. A government audit report last month said local governments have piled up 10.7 trillion yuan ($1.6 trillion) in debt and some can only pay their debts by borrowing more money.
The rise in deposit rates will help to reduce losses suffered by families that keep money in the bank, although the new level still is below inflation. Analysts say the gap has prompted some savers to divert money into speculating in real estate and stocks, fuelling fears of a price boom and bust.
Factory production, bank lending and other economic indicators are easing but the World Bank is forecasting economic growth of 9.3 per cent this year.