People's Bank of China assistant governor Yi Gang said Friday the new modest rate increase on bank loans was appropriate, helping to keep the economy growing on a fast, stable track.

 

The central bank raised the minimum rate commercial banks charge on one-year loans in local currency, the yuan, 27 basis points, to 5.85 percent. The increase, which came into effect Friday, was the first since October 2004.

 

It comes as China's already strong economy recorded a 10.2 percent growth rate in the first quarter, prompting the government to order measures to rein in over-investment, a major driving force for the economy.

 

Yi told a banking symposium in Beijing that he believed the economy was developing in a healthy way, seeing high growth paired with low inflation, so macro-control policies should be mild.

 

Government figures show inflation for the first three months stood at a mere 1.2 percent.

 

Domestic banks, however, have consumed roughly half of their lending target for the whole year, adding 1.26 trillion yuan in loans, up 13.98 percent from a year ago

 

Fielding a question about whether the central bank would announce further interest rate hikes or use other monetary policy tools to curb investment, Yi said the decision would depend on economic performance.

 

The People's Bank leaves interest rates on deposits unchanged as, theoretically, increased interest paid on deposits could encourage savings and dampen spending enthusiasm at a time when China is hoping its consumers will contribute more to economic expansion.

 

As the gap between deposit and loan rates widened, Yi said commercial banks should refrain from lending too much -- especially those for industries suffering from over-investment -- simply in pursuit of profits.

 

(Xinhua News Agency April 29, 2006)