The Chinese central bank raised the key interest rates by 25 basis points as focus turned on persistently high inflation. The benchmark one-year deposit rates will go up to 3.25 percent from 3 percent previously, while one-year lending rates is revised to 6.31 percent, the People's Bank of China said. The rate hikes will come into force on Wednesday.
Inflation went beyond the government's target rate of 4 percent in February to hit 4.9 percent on an annual basis.
The Chinese government's new five year plan has shifted focus from scorching growth to more sustainable economic development. And the government sees the danger of rampant inflation. According to prime minister Premier Wen Jiabao, inflation is a tiger that once set free will be very difficult to put back into its cage.
It's the fourth time in the last six months that the Chinese central bank has raised key rates in a bid to fight inflation. However, some experts have felt that China cannot escape the inflationary spiral as long as it keeps it currency, yuan, pegged to the U.S. dollar.
The more strength the Chinese economy gains with each passing day, which it does, the weaker the American economy becomes, making it ever more impossible for China to keep the cost of pegging the currency to dollar at a comfortable level.
As China’s economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China, Peter Schiff wrote in Daily Markets.