China May Pause After Third Rate Move as Wen Bets Inflation 'Controllable'

China raises interest rates as part of inflation fight

The benchmark rate for one-year loans will be raised 0.25 percentage points to 6.56%, effective Thursday, the central bank announced. The rate paid on deposits will rise a similar margin to 3.5%.

Inflation hit a 34-month high of 5.5% in May and is believed to have risen in June even as an overheated economy cools gradually under the pressure of investment curbs and other controls.

The slowdown in some industries has prompted fears more interest rate hikes might trigger a sharp slump. But most analysts say the government should be able to avoid that.

"Benchmark lending rates are still low relative to the pace of economic growth," said Capital Economics analyst Mark Williams in a report.

Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power and can fuel unrest.

The Cabinet's planning agency says June inflation, due to be reported next week, is likely to exceed May's level due to a jump in food costs blamed on summer floods that damaged crops.

Private sector forecasters say June inflation could pass 6%. They say the mix of rapid growth and higher inflation means Beijing should further tighten access to credit.

Analysts blame the inflation spike on the dual pressures of rising consumer demand that is outstripping food supplies and a bank lending boom that was part of Beijing's response to the 2008 global crisis.

Beijing relies less than other major governments on interest rates to regulate the economy. Instead, it uses more targeted controls such as loan quotas while avoiding across-the-board rate hikes that push up borrowing costs for state companies.

The rate hike also will boost costs for local governments that borrowed from banks to pay for constructing highways and other public works. A government audit report last month said local governments have piled up 10.7 trillion yuan ($1.6 trillion) in debt and some can only pay their debts by borrowing more money.Read more...