MercoPress. South Atlantic News Agency

China’s New Year takes off with higher interest rates, third time since October

Beijing is determined to contain inflation particularly sensitive food prices

China's central bank said Tuesday it will increase key lending and deposit rates by a quarter percentage point, effective Wednesday. This is the third People’s Bank of China rise since last October, a move aimed at combating stubbornly high inflation.

The surprise announcement on the final day of China’s Lunar New Year holiday means that one-year Yuan lending rate increases to 6.06% from 5.81% while the one-year deposit rate jumps to 3% from 2.75%. The bank most recently raised these interest rates on December 25 and October 20, 2010. The October increase was the first one in three years.

The Bank of China has also recently raised reserve requirements as a mean of controlling growth.

Inflation for 2010 as a whole was 3.3%, above the official target of 3%. But it was even higher towards the end of the year, hitting a 28-month high of 5.1% in November, before easing to 4.6% in December. However it is expected to have picked up again in January with soaring food prices. The government has now raised its CPI target to 4% for 2011

Fearing tighter monetary policy will dampen China's demand, commodity markets fell after the central bank announcement. Three-month copper fell below 10,000 US dollars a metric ton and U.S. crude oil futures prices dropped.

The MSCI world equity index held on to gains, trading up 0.15%, but the FTSEurofirst 300 index was down 0.3%, turning negative after China's move.

Beijing also hopes higher rates will encourage savers to keep more of their money in banks and also weigh down the demand for mortgage loans and a growing housing and real estate bubble.

Anti-inflation talk from the central bank in recent months has primed investors for more policy tightening and, even with the latest move many believe further tightening is on the cards.

While tighter policy may put a lid on China's growth and has taken a toll on the country's share market, many analysts believe any economic slowdown will be moderate.

But at the end of the day China is tightening policy at a time when United States and euro zone interest rates are at record lows is a mark of confidence within the country that its economy, the world's second-largest, is on solid ground.