The People's Bank of China increased its benchmark one-year deposit rate by roughly one-quarter percentage point, or 27 basis points, to 4.14%, and also raised the one-year lending rate about one-fifth percentage point, or 18 basis points, to 7.47%. The central bank's last interest rate increase occurred in September, Reuters reported.
Earlier this year, China's monetary officials shifted their monetary bias from "prudent" to "tight' to slow the nation's double-digit GDP growth economy.
Economic boom
China's GDP has grown more than 10% for more than four years, serving as a centerpoint for not only emerging market development in Asia, but also as an engine for global growth. Low-cost labor and the nation's weak currency, the yuan (which is fixed at an artificially low rate, a trading band, by the Chinese government), have fueled an export boom and a large trade surplus. That surplus has led to many benefits for the world's most populous nation, including rising real incomes, an expanded middle class and historic economic development, but has also stoked inflation.
Further, monetary and industrial officials in the world's other major economic regions in the United States and Europe have urged Chinese officials to slow the nation's economy -- and implement other reforms -- to take price pressure off commodities (such as oil) and resources.
2008 outlook
Economist David H. Wang told BloggingStocks on Thursday that China's sixth interest rate increase in 2008 represented "the right monetary policy decision," and there's more tightening ahead.
"Obviously there's significant inflation in the economy, above 6%, so the interest rate hike is not terribly surprising, but look for more interest rate increases in 2008," Wang said. "China is more likely to act to put a lid on domestic inflation through interest rate increases than it is to act on currency reform in 2008."
Wang argued that China should be able to slow its economy "to slightly below 10%" but a slowdown to below 8% GDP growth in 2008 -- which some analysts have forecast -- is not likely to be achieved.
"There are too many demand factors in China feeding growth ...infrastructure building, middle-class income, investment flows, and those, combined with the China's commitment to large export surpluses, means it will be very hard for the government to slow growth below the 10% level," Wang said. "It's highly unlikely that growth will dip below 8% in 2008."
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