China's central bank increased interest rates on Tuesday for the fourth time since October, raising suspicions that data next week may show inflation rose more than expected in March.
The tightening of monetary policy adds to six official increases in bank reserves over the same period and follows a declaration by China's top leaders that controlling inflation was their most important task this year.
Benchmark one-year deposit rates will be lifted by 25 basis points to 3.25 percent and one-year lending rates will be raised by 25 basis points to 6.31 percent, the People's Bank of China said in a statement on its website. The rises take effect from April 6.
The March inflation figures must be very high, said Xu Biao, economist with China Merchants Bank in Shenzhen.
It is an aggressive move, and the central bank is acting more aggressively than the market had expected. The latest interest rate rise, although at only one quarter point, may hurt investor confidence and the real economy quite significantly. More importantly, it is not the end of China's monetary policy tightening.
China is due to report the March consumer price index on April 15. Economists expect the data to show that consumer inflation rose to 5.1 percent in March, matching a 28-month high seen in November.
Inflation was 4.9 percent in February, unchanged from January.
We did expect a rate hike in April so it's not a complete surprise, said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.
They are raising rates to stem the inflationary pressures in the economy. We expect another two hikes of 25 basis points each this year. We are already seeing a slowdown in the Chinese economy but they need to raise rates a couple more times.
They will still use reserve requirement increases but they also need to raise rates. I think they will use different tools (to tackle inflation).
Inflation worries are increasing globally. Most central banks in emerging markets in Asia have raised interest rates as the region emerged strongly from the global financial crisis.
The European Central Bank is expected to raise interest rates on Thursday for the first time since the crisis and comments from some Federal Reserve policymakers have raised market expectations that the U.S. central bank is moving toward a tighter policy.
So far, complaints among Chinese about rising prices have amounted to little more than grumbles, but serious inflation has sparked social unrest in China in the past.
This is ultimately good news because it reduces the risk of policy error in China that markets were getting nervous about, Benoit Anne, head of emerging markets strategy at Societe General, said of the rate rise.
It reduces the danger of Chinese policymakers being too dovish and shows them addressing the mounting inflation risk which is a massive tail risk for emerging markets. We will see a few more hikes as China needs more monetary tightening.
The central bank boosted bank reserves, or the amount of cash that banks have to put aside, by 50 basis points to 20 percent on March 18 to lock up cash that banks could otherwise lend out and potentially fuel inflation in the world's fastest growing major economy.
(Reporting by Soo Ai Peng and Tony Zhou; Writing by Koh Gui Qing and Neil Fullick; Editing by Dean Yates)