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Interest Rates Up Again to Cool down Economy
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Starting from Saturday, commercial banks' one-year benchmark deposit and lending rate are both raised by 0.27 of a percentage point to 2.52 percent and 6.12 percent respectively, China's central bank announced interest rate hike yesterday.

"In order to consolidate the macro economic control achievements and curb demand for credit, it is imperative to restrain investment and credit expansion by using interest rates," the People's Bank of China explained.

"The rate hike is expected to lead to a sound growth of both investment, money supply and credit, and is also expected to keep the national economy on a fast, healthy and stable track."

The bank raised the lending rate by the same margin in April, but left the deposit rate unchanged, an arrangement that some economists said only made banks more likely to lend as the spread between deposit and lending widened.

"The latest rate hike is no surprise given that the economy is showing no signs of slowing down," said Wang Yuanhong, an economist with the State Information Centre.

The rate hike margin, Wang said, was moderate, meaning the central bank still has room to take bigger steps if the economy maintains its growth pace.

China's economy grew 11.3 percent in the second quarter, the fastest pace since 1996, prompting economists to call on the government to take stronger macro control measures to cool it down.

"It (the rate hike) comes as no surprise, actually it should have come earlier," said Yuan Gangming, an economist with the Chinese Academy of Social Sciences.

"The first rate increase (in April) largely failed, as shown by robust investment and credit growth in the last two months. This indicates the central bank should have moved much earlier."

The central bank has increased the reserve ratio the proportion of deposits a bank is required to have with the central bank twice this year in a bid to curb rapid credit growth, a policy that some economists say is ineffective.

"Rate hikes are more effective than increasing the reserve ratio," Yuan said.

The increase for both the long-term deposit and lending rates is larger than that for short-term deposit and lending rates, a move that the central bank said was designed to curtail fixed asset investment and long-term lending demand.

The five-year deposit rate is up by 0.44 of a percentage point to 4.14 percent, while the rate for loans over five years or longer has been raised by 0.45 of a percentage point to 6.84 percent, the central bank said.

(China Daily August 19, 2006)

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