MercoPress. South Atlantic News Agency

In a surprise move China raises interest rate for the first time since 2007

A property bubble in cities and inflation seems to be the target

China has raised interest rates for the first time since 2007, as it tries to rein in inflation and dampen its red-hot real estate market. The People's Bank of China said it will raise its one-year lending rate to 5.6% from 5.31% and its one-year deposit rate to 2.5% from 2.25%.

This is the first time China has raised the cost of borrowing since onset of the global financial crisis. The surprise move caught financial markets and investors off guard.

European and U.S. stocks fell, with mining companies hit on fears that slower growth in China would hurt demand for raw materials.

The dollar rose as the rate rise made investors more risk averse. The dollar tends to be regarded as a relative safe haven in times of uncertainty.

Analysts said China had delayed raising rates fearing it could lead to an influx of speculative money, making it more difficult to keep its currency stable.

Inflation has been picking up in recent months and property prices in major Chinese cities have remained high despite measures to prevent a bubble.

The Chinese government was also keen to rein in a recent surge in bank lending that could lead to the economy overheating.

The decision was also seen as another tactical move in the delicate game between China and the United States and Europe who believe Beijing is unfairly holding the Yuan down to give its exporters an advantage in global markets.

China counters that a faster rising Yuan would do nothing to address what it sees as the US deteriorating competitiveness and shortfall in savings while the prospect of the Federal Reserve starting to print money again to revive a struggling U.S. economy is likely to drive the dollar lower.