China increases interest rates

China's central bank surprised the markets yesterday with its first interest rate increase in nearly three years, a move reflecting concern about rising domestic asset prices and stubborn inflation.

It said it would raise benchmark one-year deposit and lending rates by 25 basis points each.

Oil prices fell, stocks pared their gains in Europe and the dollar rose across the board after the announcement as investors were caught off guard by the tightening step. "The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, the chief economist at Citic Securities in Beijing. "The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

Several leading economists have suggested the central bank increase deposit rates to keep savers' returns in positive territory. China reported consumer inflation of 3.5 per cent in the year to August and economists expect that the pace climbed to 3.6 per cent last month.

The Communist country is due to report third-quarter GDP and a suite of economic data for September tomorrow. Economists expect that economic growth slowed to 9.5 per cent year on year last quarter, down from 10.3 per cent in the second quarter. "They [raised rates] now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong.