China raises rates to combat inflation

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China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy. The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People's Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent. The move comes as a surprise to some, after Credit Suisse Group AG, Morgan Stanley and Bank of America-Merrill Lynch said officials may pause in tightening. While Japan's disaster and Europe's debt woes are clouding the global outlook, PremierWen Jiabao's government is more focused on the estimated 5 percent jump in consumer prices last month, said analyst Shen Jianguang. It's "very significant" that China raised rates before the March inflation data has even been announced, said Shen, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and theEuropean Central Bank. "This is a good preemptive move." Crude extended its decline. Oil for May delivery on the New York Mercantile Exchange dropped as much as 97 cents to $107.50 a barrel and was at $107.95 at 12:45 p.m. London time. Chinese officials may be on guard against increased inflows of "hot money," or speculative capital, as today's move widens the differential with rates in developed economies. In the U.S., the Federal Reserve has kept its benchmark near zero since December 2008. Qu Hongbin, chief economist for China at HSBC Holdings Plc in Hong Kong, said a policy of "gradual" yuan appreciation likely remains intact. The Chinese currency, described by the U.S. as "substantially undervalued," gained 4 percent against the dollar in the past year and touched 6.5452 on April 1, the strongest level since 1993. Premier Wen last month described inflation as "a tiger" that once set free will be difficult to cage, and also as a potential threat to social stability. "Exorbitant" house price increases in some cities are a top public concern, he said. China's inflation accelerated to 5.2 percent last month, the fastest pace since July 2008, according to the median estimate in a Bloomberg News survey of nine economists. Consumer prices jumped 4.9 percent in February from a year earlier, topping the government's full-year target of 4 percent. Today's announcement contrasted with central bank Deputy Governor Yi Gang saying March 23 that interest rates were at a "comfortable" level and that he was "not too worried" by inflation because price increases will slow in the second half of the year. - Bloomberg