China's central bank announced Friday it will raise interest rates for the third time this year in an effort to cool -- but not stop -- an economy that is growing at its fastest pace in over a decade.
Benchmark lending and deposit rates will each rise by 0.27 percentage points from Saturday, the People's Bank of China said in a statement on its website.
China's main bank lending rate was increased to 6.84 percent while the deposit rate rose to 3.33 percent.
"The interest rate adjustment is to effectively guide rational growth in credit and investment, and to effectively adjust and stabilise inflationary expectations, and maintain general price stability," the central bank said.
A quick rate hike had been widely predicted after the government said on Thursday that the economy expanded by 11.9 percent in the second quarter and 11.5 percent for the first six months of the year.
Such a pace had not been seen since the mid-1990s and analysts said Friday they had expected the rate increase as the first of a range of moderate measures aimed at keeping the economy on an even keel.
"No surprises here," said Ben Simpfendorfer, an analyst at the Royal Bank of Scotland in Hong Kong.
Friday's regulatory adjustment was accompanied by a cut in withholding tax on interest from bank deposits to five percent from 20 percent, a move designed to curtail overabundant liquidity in the financial system.
The interest rate increase was also aimed at taming what appears to be resurgent inflation after the consumer price index, the main gauge of prices, jumped to 4.4 percent in June from 3.4 percent in May.
Currently inflation for the six months to June stands at 3.2 percent, already above the government's full-year target of 3.0 percent, and analysts said that the government may have to do more on this front.
"Raising lending rates will not have much influence on high inflation, which was mainly pushed high by a very fast increase in food prices," said Huang Haizhou, a Hong Kong-based economist with Barclays Capital.
Nevertheless Huang and Standard Chartered senior economist Stephen Green said that Friday's rather modest tightening signalled that Beijing's regulators were unconcerned about the rapid expansion of Asia's second-biggest economy.
"The atmosphere in Beijing is still relatively relaxed, with no obvious belief among officials or local economists that this economy is careering out of control or growing seriously above potential," said Green.
Prior to the release of the growth data Thursday, several government-linked research agencies had aggressively warned that the Chinese economy needed strong medicine to bring it to heel.
But the growing consensus among analysts and officials now appears to be that economic measures previously taken are starting to kick in and that the phenomenal growth can continue.
With two interest rate hikes already this year, as well as five increases in the bank reserve ratio -- the amount of money banks must hold in reserve, there is no point in doing too much, they argued.
"China's macro-economic policies resemble traditional Chinese medicine which takes effects slowly," said Huang.
"There is no need to prescribe any strong medicine when the patient has almost recovered."
Green on Thursday said the government appeared to be more at ease with the fast economic growth this year, compared with concerns when the pace was slightly lower but still roaring at double-digit pace from 2004-2006.
He also said the government's relaxed approach was justified.
"We expect the boom to continue; we believe it to be sustainable," he said.
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