China raises key interest rates by 0.27 per cent

19 August 2006

Mumbai: China's central bank, the Peoples Bank of China, raised its benchmark lending and deposit rates simultaneously for the first time in two years in a bid to curb an investment boom and a creeping inflation.

The bank raised its one-year lending rate by 0.27 percentage point to 6.12 per cent and the one-year deposit rate by the same amount to 2.52 per cent, according to a statement on the bank's web site.

China had increased its key lending rate in April this year but did not raise deposit rates. That failed to slow the world's fourth-largest economy, which grew 11.3 per cent in the second quarter from a year earlier - the highest rate of growth in over a decade.

China's economy grew by 10.9 per cent in the first half of this year, driven by a faster growth in credit and increased diversion of land for industrial purposes. This has raised the spectre of idle factories, falling profits and rising bad loans, according to analysts and the World Bank.

The central bank had raised commercial banks' deposit reserve ratio earlier this week by 0.5 per cent to curb excessive bank lending. However, the central bank decided to lower the interest rate for housing mortgage loans from 0.9 times the benchmark rate to 0.85 times in order to giver greater say for market forces.

For other commercial loans, the base rate will be 0.9 times the benchmark rate.