The central bank Thursday raised interest rates on deposits of two major overseas currencies, namely the US and Hong Kong dollars, which analysts are calling a natural response to recent rate hikes in the United States.

The People's Bank of China (PBC) raised its one-year interest rate on small deposits of the US dollar by 25 basic points to 1.125 percent, and on small Hong Kong dollar deposits by 18.75 basis points to 1 percent.

The increases take effect today.

Small deposits refer to deposits below US$3 million.

Chinese banks negotiate rates with clients on larger deposits.

"I believe it's a response to the recent spate of interest rate increases in the US," said Wang Yuanhong, senior analyst with the State Information Center.

"The interest spread has been rather broad, and you need to take care of the interests of local residents," he said.

The US Federal Reserve has raised its target for the federal fund rate eight times since the second half of last year to the current 3 percent, while the PBC has only announced one 31.25 basic point rate rise on small US dollar deposits before yesterday's move. That was in November 2004.

US dollar interest rates in China have largely moved in tandem with US rate fluctuations, but the PBC has been far less aggressive in raising rates in recent months than the Federal Reserve.

This is largely because higher US rates could help slow down the inflow of foreign capital, subsequently reducing the upward pressure on local currency exchange rates, or the renminbi, analysts say.

Wang said the PBC's increase in dollar rates is not necessarily indicative of a possible increase in local currency interest rates this time, as it typically does.

"I don't think so, because prices are relatively low," he said.

China raised interest rates on renminbi deposits and lending last October, the first time in nine years, to contain inflationary pressure.

Prices have so far remained largely subdued, although some economists are calling for gradual rate increases to replace drastic administrative measures in cooling down investment growth and prices.

(China Daily May 20, 2005)