The People's Bank of China said on Saturday it would increase its one-year benchmark lending and deposit interest rates by 25 basis points, the second rate hike in just over two months.
Annual inflation hit a 28-month high of 5.1 percent in November, but while almost all investors and analysts thought more tightening was coming, there was uncertainty about whether the central bank would raise rates before the end of the year.
QING WANG, CHIEF CHINA ECONOMIST AT MORGAN STANLEY IN HONG KONG:
This rate hike demonstrates Chinese authorities' determination to keep inflation under control up front, or front-loaded tightening.
Compared to rate hikes in the beginning of next year, a rate hike before year end would have more tightening impact, as the interest rates on the medium- and long-term loans/deposits are reset at the beginning of each year according to the base rates.
XU BIAO, AN ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN:
It's a surprise for me. The second rate hike this year may indicate that China is entering a cycle of interest rate increases.
The move may also be targeted at recent developments in the property market. In cities like Shenzhen, property prices are rising quite strongly, and the central bank may want to curb asset price increases with higher interest rates.
HE YIFENG, ANALYST WITH HONGYUAN SECURITIES IN BEIJING:
It is a little bit of a surprise, but the move should be welcomed by the market. The central bank has increased the interest rates before the end of 2010, which means the possibility of increasing interest rates in the beginning of 2011 will be smaller. I don't think the central bank will increase interest rates before March.
BRIAN JACKSON, ECONOMIST WITH ROYAL BANK OF CANADA IN HONG KONG:
We expected a rate hike by the end of the year, though Christmas Day is something of a surprise -- a rate hike is not normally on the wish-list for Santa Claus, but in China's case this is a prudent move. We think it is increasingly clear that using quantitative measures, such as reserve ratios, to rein in liquidity and credit has not been enough, and that adjusting the price of credit -- that is, interest rates -- is needed to get price pressures under control, so today's move suggests Beijing is also coming around to this view. We expect another 75 basis points of rate hikes in 2011.
(Reporting by Zhou Xin and Jason Subler; Editing by Mike Nesbit)