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China raises lending rate to slow booming economy
Thu Apr 27, 2006 6:28 AM ET
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BEIJING (Reuters) - China raised interest rates on Thursday for the first time in 18 months in what economists said was an attempt to slow a boom in credit and investment growth.

The People's Bank of China said on its Web Site (www.pbc.gov.cn) that it was raising its benchmark one-year lending rate to 5.85 percent from 5.58 percent, effective from Friday.

The central bank's benchmark one-year deposit rate remains unchanged at 2.25 percent.

"The increase in the lending rate is aimed at further strengthening the fruits of macro controls and keeping solid momentum for the economy to grow in a continuous, rapid, coordinated and healthy manner," the bank said in a statement.

"This is also aimed at letting economic levers play their role in resource allocation and macro control," it said.

The bank also said it would increase benchmark lending rates for other maturities accordingly. For example, the six-month rate goes up to 5.40 percent from 5.22 percent.

The interest rate increase is the first since October 2004.

It follows an acceleration in annual economic growth in the first quarter to 10.2 percent that had fanned worries among economists that the economy was overheating.

The increase came as a surprise to most economists.

"This is very unexpected. The market was anticipating a hike in reserve deposit ratios. It's a positive step in so far as it should help take some of the steam out of investment demand. It also signals a proactive central bank," said Ben Simpfendorfer, a strategist with Royal bank of Scotland in Hong Kong.

Chinese banks have been permitted since October 2004 to charge borrowers as much as the market will bear, but they must charge interest that is no less than 90 percent of the central bank's benchmark.



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